FTSE media firm ITV (LSE: ITV) has dropped 10% from its 22 July 12-month traded high of 88p.
This might signal the business is worth less than before. Or it could indicate a stock undervaluation and therefore a bargain to be had.
I did a deep dive into the firm and ran some key numbers to find out which is the case here.
Are the shares undervalued?
ITV trades at a price-to-earnings ratio of just 7.4 against an 11.9 average for its competitors. These comprise Atresmedia Corporación de Medios de Comunicación at 9.7, Métropole Télévision at 10.1, MFE-Mediaforeurope at 11.6, and RTL Group at 16.4.
So, Britain’s biggest free-to-air broadcaster looks very undervalued on this measure.
The same is true of its price-to-sales ratio of 0.9 compared to the average 1.1 of its peers.
However, its 1.7 price-to-book ratio looks overvalued against its competitors’ 1.2 average.
To get to the bottom of its valuation, I ran a discounted cash flow (DCF) analysis. This shows where any stock should be priced based on future cash flow forecasts.
Using other analysts’ figures and my own, the DCF shows ITV is 62% undervalued at its current price of 81p.
So the fair value for the shares is £2.13, although market unpredictability could push them lower or higher.
Does the business support this bullish view?
A risk for the firm is the cut-throat competition in its sector, which could squeeze its margins over time.
It also warned in its 2024 results that its Studios’ margins would fall this year because of the 2023 US writers’ and actors’ strikes. These have delayed £80m of revenue from 2024 to 2025.
It added that its Media & Entertainment advertising revenue would also be hit this year for two reasons. The first is the introduction of tighter advertising restrictions on less healthy foods in October. And the second is the lack of a major football tournament in the summer.
That said, its 2024 results showed earnings rose 11% year on year to £542m. Positively as well, its ITVX digital streaming service saw viewing up 12% and advertising revenue rise 15%.
Is the dividend yield set to rise?
ITV kept its annual dividend at 5p, which yields 6.2% on the current 81 p share price. Analysts forecast this will stay the same in 2025.
Consequently, investors considering a stake in shares of £11,000 (the average UK savings) would make £9,416 in dividends after 10 years. After 30 years, this would rise to £59,324.
It should be noted here that these returns are based on an average 6.2% over the periods.They also assume that the dividends are reinvested back into the stock – known as ‘dividend compounding’.
That said, analysts forecast ITV’s dividend will rise to 5.17p in 2026 and to 5.66p in 2027. These would give respective yields of 6.4% and 7% based on the present stock price.
Will I buy the stock?
Aged over 50, I focus on shares paying 7%+ a year in yield, which this is not as yet. So, I will not buy it on that basis.
Even if it did have that yield, I would not buy it currently, given the volatility risk inherent in its sub-£1 price. Every penny in the stock represents 1.23% of its entire value.
This post was originally published on Motley Fool
