After Pandemic Hit, Vaccine Rally and Brexit: What's in Store for ITV's Stock in 2021?

ITV CEO Carolyn McCall
Anthony Harvey/Getty Images

ITV CEO Carolyn McCall

J.P. Morgan is bullish and recently boosted its stock price target, while bearish Bernstein says that, after December gains driven by news of the coronavirus vaccine, risks are "no longer priced in."

As the coronavirus pandemic hit advertising revenue across the media industry and the future relationship between the U.K. and the European Union after Brexit remained unclear until a trade deal unveiled just in time for the holidays, British TV giant ITV's stock had a particularly difficult 2021.

Due to the pandemic, the U.K.'s biggest free-to-air commercial broadcaster had to go without a summer edition of hit reality dating show Love Island and recorded a 43 percent drop in second-quarter advertising revenue, which in 2019 accounted for 53 percent of its total revenue. The company's shares then hit a multi-year low of 50.06 pence ($0.67), down 67 percent from their year-end 2019 value of 151 pence ($2.01), and ended up getting kicked out of the FTSE 100 stock index.

From early March through November, the stock traded below 1 pound, but December brought a rebound, driven in part by investor optimism about Britain becoming the first western country to approve and roll out the Pfizer/BioNTech coronavirus vaccine. That left the stock closing last week, before Christmas and a Monday holiday, at 108.95 pence ($1.47). That is more than double the stock's low hit earlier in the year, but still 29 percent below its 52-week high of 153.80 pence.

So where will ITV's stock go in 2021? Analysts can't seem to agree.

Ian Whittaker, a veteran media analyst, is optimistic and tells THR that "ITV is having a good fourth quarter, and I think their guidance of low single-digit growth is probably on the cautious side given it seems like advertisers [were] spending into the run-up to Christmas." And he added: "Pre-COVID, ITV grew total ad revenues in the first quarter and will grow in the fourth quarter. My point being that we may be getting to a stage where advertisers are more positive on TV."

Similarly, J.P. Morgan analyst Daniel Kerven in early December boosted his ITV stock price target by 20 pence to 145 pence ($1.94) while maintaining his "overweight" rating, betting on more upside.

But Barclays analyst Julien Roch, who has an "equal weight" rating on ITV shares, in a mid-November report, following the company's latest financial update, raised his price target from 80 to 100 pence, but suggested that the ad recovery is "arguably already priced in."

He explained: "ITV is already 50 percent off its lows owing to advertising recovering and vaccine news. The key question for investors therefore becomes whether they should chase the shares hoping they can go back to their 2019 volatile average of 126 pence (104-157 pence range) or whether they have gone high enough."

Roch concluded: "While they may overshoot in the short term (broadcasters historically have overshot when advertising is improving), the structural analysis ... suggests that the broadcast division, excluding [streaming service] Britbox is already back to seven times estimated fiscal year 2021 enterprise value/earnings before interest, taxes, depreciation and amortization, which seems fair for a no-growth business, but aggressive if the TV bears are right – [meaning] we would not chase the shares."

Roch increased his 2020 advertising forecast from a projected 14.5 percent drop to an 11.2 percent decline, but lowered his 2021 estimate from 6 to 8 percent.

And Bernstein analyst Matti Littunen is one of the biggest bears on ITV. He downgraded the stock from "market-perform" to "underperform" after its financial update in November with a 71 pence price target.

In his report, entitled "The risks no longer priced in," he wrote: "In July, we initiated on ITV with a negative outlook on the fundamentals," explaining: "The main risks still hold: a seemingly impossible online transition, a margin-negative mix shift, and macroeconomic uncertainty (with 75 percent U.K. revenue exposure)."

Littunen continued: "What's changed since then is the market valuation: ITV is one of the main winners of the recent vaccine recovery trade in our coverage." So, after initially feeling the risks to its business "were priced in, after a roughly 30 percent rally since then, we no longer believe this is the case."

Littunen doesn't even see streaming service Britbox as a big value driver, noting that "we still lack any reported metrics." Management said that the 2020 release of the first original series for the streamer, a re-launch of the 1980s political puppet satire Spitting Image has been "very successful." App download data from Apptopia "seems to confirm an uptick in downloads and estimated daily active users, but the base of downloads had been low until then and started trending down quickly after then initial boost," the Bernstein analyst wrote. "We'll have to wait until the first half next year for the next original."

But the analyst concluded that Britbox doesn't have deep enough content strength. "We continue to think that the likelihood of each of the sparse originals being a hit big enough to tide over the service is too low to count on," Littunen wrote.

Meanwhile, Berenberg is neutral on ITV's outlook, rating the stock at a "hold" despite a projected fourth-quarter ad increase. "What is happening is that advertising budgets held back from earlier in 2020 are now being spent," the Berenberg team wrote in a November report. "2021, however, is a new budgetary year, and, given tough comps, we expect first-quarter advertising to decline."

Berenberg continues to see the stock as cheap, but is worried about challenges for the company amid the rise of streaming competition. "ITV is not expensive, even after the 'vaccine rally,' but our concerns remain that U.K. viewers, with such a plethora of viewing choice, will continue to drift away from ITV," its latest report argued.

"ITV, because it wants consumers to pay for Britbox, is restricting online video advertising inventory, the sale of which could help offset the decline in linear," the Berenberg team concluded. "Given stiff competition, we think ITV’s paid-for strategy has less chance of success than the video advertising strategy of many of its peers."

One thing analysts generally agree on is that the planned return of Love Island in the summer of 2021 should provide a positive signal for ITV and its stock.

Littunen highlighted though that ITV's online viewing dropped 6 percent for the first nine months of 2020, "because there was no Love Island [this summer] and reduced sports on ITV." And he argued that "this only illustrates how dependent the growth of the service, especially among young audiences, has been on that one hit show."

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