We tipped ITV (LSE: ITV) as a ‘buy’ at 87p, back in September last year. Since then, the shares have done very well, gaining 118%.
Investors have bought into chief executive Adam Crozier’s strategy of making the broadcaster less dependent on volatile advertising revenues and more on building a high-quality television content business.
The fruits of this strategy are starting to feed through to ITV’s profits. It is making more money from producing good-quality, successful programming, and this will undoubtedly make ITV a more valuable business in the future.
That said, it’s difficult to see this business dominating the company for a long time – if ever.
Advertising revenues remain the key to profits and ITV is doing a good job here despite lots of competition from other television companies and the internet.
It remains the only realistic option for advertisers to gain exposure to mass audiences, while it still has a viewing share of over 23%. Advertising revenues should be fairly stable this year.
Financially, things are looking up too. Profits and cash flows are very healthy and growing. Dividends are growing fast whilst interest costs are going down after the company bought back a large amount of bonds.
The pension-fund deficit needs watching, but it has improved over the last year.
The real issue for investors now is ITV’s lofty share price.
When we tipped the shares, they could have been bought for just over ten times forecast earnings. Today you are having to pay nearly 18 times. On this basis, ITV now trades at a 13% premium to rival BSkyB, despite having a similar amount of expected profit growth.
In both absolute and relative terms ITV shares now look too expensive. If you’ve been fortunate enough to make some money from these shares, taking some profits now looks like a good idea.
Verdict: take profits