UK Edition
Questor: ITV is worth a look – the stock yields 4.6pc and the outlook for earnings is improving
Broadcaster ITV can point to a gentle three-month winning streak in its shares, even as the wider stock market continues to wobble.
It just may be that the thoroughly respectable 4.6pc dividend yield, twice covered by earnings according to analysts’ consensus forecasts, is attracting investors back in, especially as those analysts are now nudging their profit estimates up rather than down.
They now seem to think that estimates for flat advertising revenues in 2018 may be too low, after what is likely to be a mid-single-digit drop in 2017, helped by revenues generated by this summer’s World Cup football tournament and the British economy’s ongoing resilience.
Tomorrow’s interim results will therefore be particularly interesting, especially as they will be Dame Carolyn McCall’s first chance to address the company’s shareholders as chief executive.
It is too early to expect her to announce major changes but she may give some perspective on where she feels the group’s strengths and weaknesses lie.
On the plus side, ITV is less reliant on advertising, while its range of content to sell around the world is much improved. In addition, cash flow is good and profits cover the interest bill many times over.
This all gives Dame Carolyn time to mull over her options, although she will be aware that Liberty Media, the American giant, still owns a 10pc stake and rumours of a bid for the British broadcaster still surface from time to time.
On the downside, June’s net debt figure of £1.4bn (including the pension deficit) was pretty much back to the levels seen in 2009 after a string of acquisitions, the return of ordinary dividends and four special dividends.
That is not a problem now but interest rates are (slowly) rising and one day a downturn might hit earnings once again.
ITV also still operates in a competitive arena as consumers get more and more used to watching content over a device of their choosing at a time of their choosing.
Dame Carolyn may therefore decide to press ahead with additional investments in content and technology. But with earnings estimates rising and the shares still trading at a discount to the broader UK stock market on a forward price to earnings ratio of around 11, this could be a good time to look at the stock, which this column first assessed as a buy at 170p in autumn 2016, riding it up and then down in the meantime.
In summary, analysts may be too bearish on advertising for 2018 and ITV’s attractive yield and valuation mean it could be a winner this year.
Questor says: buy
Ticker: ITV
Share price at close: 171.45p
Update: Serco
With the benefit of hindsight this column misjudged the recovery at Serco, tipped in January 2017, as the shares have ground relentlessly lower over the past 12 months even though the support services firm has so far delivered on its recovery plan.
The good news is that last week’s full-year results were unremarkable, and that is frankly a good thing, given the company’s own recent history and the tale of woe for the support services sector provided by Carillion, Capita, Interserve, Mitie and others.
The company, led by Rupert Soames, the chief executive, met its earnings targets for 2017, with underlying profit down by 15pc to just under £70m.
Serco stuck to its 2018 goal of £80m in underlying profits as it clocked up £3.4bn in new orders. That was the best haul since 2012 and took the total order book to £10.7bn, which includes a good spread of overseas business.
Better still, net debt came in at just £141m, to leave the firm trading comfortably within the covenants laid down by its lenders, while the pension schemes are in surplus.
A forward p/e ratio of more than 25 for 2018 is deceptive as earnings are still depressed. Patience will be needed but the balance sheet means investors can afford to wait.
Questor says: hold
Ticker: SRP
Share price at close: 90p
Russ Mould is investment director at AJ Bell, the stockbroker