A stock in one chart: Is ITV a value trap?

Former City analyst Phil Oakley believes the fortunes of many companies can be summed up in a single financial chart. This week it's ITV.

It has been a rough year for ITV's shareholders. Twelve months ago, the shares were flying high as the company continued to increase profits and pay out special dividends. Now, its shares seem to be very unpopular with investors.

The result of the EU referendum in June and concerns about a weakening UK economy, and the negative impact it would have on ITV's advertising revenues, have weighed heavily on the shares. Yet profits so far have held up quite well. Consensus earnings per share (EPS) estimates from City analysts are not predicting a collapse in profits.

The company is also frequently cited as a takeover candidate. ITV's ability to reach mass audiences backed with an attractive library of TV content is seen as appealing to other media companies.

Liberty Global, the US owner of Virgin Media and ITV's largest shareholder (it holds a 10% stake) is seen as the most likely bidder. The question is, why hasn't it pounced?

The chart below shows ITV's share price and the pound/US dollar exchange rate over the last year. ITV's shares have fallen by more than a third to 167p, but there has also been a 20% fall in the value of the pound against the US dollar from $1.53 to $1.22.

For a US buyer of ITV shares, the price per share has come down from $3.88 to $2.04 - a fall of almost a half.

So, given this backdrop, it seems like a perfect time for Liberty to buy ITV. Maybe it will, or maybe it thinks that ITV's profits can't hold up and it is better off waiting for the shares to get even cheaper.

ITV has many of the hallmarks of a quality business. Its return on capital employed (ROCE) was over 40% last year, while it consistently produces lots of free cash flow. Its shares are changing hands for just over 10 times earnings and offer a prospective dividend yield of over 4%. That looks cheap. But does ITV's high dependence on advertising revenues mean that the shares are a potential value trap?

The ii view

Advertising revenue is tipped to fall further in the fourth quarter. That's bad news for ITV, which has so far failed to diversify into overseas content and global distribution after Peppa Pig-owner EntertainmentOne rejected a £1 billion bid this summer.

ITV is just as likely to be prey, however, yet even AT&T's $85 billion (£69 billion) bid for Time Warner failed to excite the share price, currently at 167p, a four-month low. Boss Adam Crozier and FD Ian Griffiths' recent decision to sell 500,000 shares each at around 200p is hardly encouraging.

Short-term, then, the outlook for ITV looks grim, despite a low valuation multiple and knockout dividend.

Read more from Phil Oakley here. Financial charts are a feature of SharePad, the web-based service from ShareScope. Voted UK's Best Investment Software 2015. For a limited period, you can get a three month subscription to SharePad for just £25.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.