ITV – market continues to chase short term data

Accounting for around a third of display advertising and including most of the larger US brands, it should come as little surprise that UK TV advertising would be sensitive to US marketing investment decisions. For those looking at just UK domestic consumption, the rebound in UK TV NAR over the last couple of years may have seemed odd,  but it has been consistent with what has been occuring on the other side of the pond and also remains in sync with US employment data. A home grown double-dip and a prospective reversal in US NFP however and one might be able to guess which way forecasting risk on UK TV NAR may go – down!   Shock, horror – media buyers now indicate that after a circa +17% YoY NAR increase for June (broadly recouping the prior June’s shortfall) and already expected -10% YoY decline for July, August and September may be down in the region of 0-5%.  Medium-term NAR growth may be flat, but a volatile short-term NAR performance provides plenty of background noise for those wishing to broker a more (or in this case, less) exciting growth story.

Where NAR goes, so goes ITV.  It may be tempting to believe that ITV may one day be able to migrate its eroding monopoly in distribution into a content origination business. 80% of profits however continue to be generated from the advertising funded broadcast activities which means an inevitable sensitivity to short-term variations in NAR, notwithstanding limited long term growth potential from NAR.  Indeed, the lack of investor confidence in ITV’s content outlook and alternative activities (eg subscription), is amply demonstrated by the inability of markets to reach beyond the next fix of monthly NAR growth data. The below chart of rolling 12 month changes in NAR and ITV’s relative share price highlights both the short-term correlation as well as an almost identically unexciting longer term one.

So what to do with the shares then?

Short term, the message is clear - ‘Don’t surf against the tide’. Top line momentum on NAR is negative, both domestically and increasingly also from the big US advertisers. Forecasting risk on earnings therefore is also negative and the shares can be expected to revert to the lower end of their historic growth rating ranges, particularly as new management remain some way off demonstrating that the longer term content strategy can be executed.   Our forecasts are below consensus. The current share price is also below our target price, although still above the lower end of our recommended range, which it would need to fall below before seriously being considered at this stage as a investment opportunity.

WYT forecasts vs consensus

ITV – flat, to no growth in prospective NAR and possibly a growth activity from content origination – but only if management can finally demonstrate that it can execute the strategy!  Zero to +1.6% CAGR without content and +0.8% to +2.8% including content.

ITV – Growth Rating Summary

Current price seems to discount growth at +0.4% on our FY3 forecasts, which remains below our +2.1% trend organic revenue growth that we are forecasting (Yr 1-3) and below our +1.6% aggregated growth rating. Short term trading momentum however is negative and the deteriorating macro environment could yet challenge even our mid term revenue expectations and lower end of our growth rating valuation ranges.