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During the summer of 2019, shares of U.K. TV powerhouse ITV hit a multiyear low of close to 100 pence ($1.31) amid fears of a hard Brexit, which was seen as likely to weigh on advertising spending.
Since then the stock has seen a rebound though, with it hitting 153.10 pence ($2.00) midday Friday of the final full week of 2019, more than 22.6 percent above its 2018 closing price of 124.85 pence. Analysts cite improved investor sentiment, a positive response to the company’s third-quarter financial update and expectations that the recent election in Britain, won by the Conservative Party of Prime Minister Boris Johnson, would finally bring clarity, one way or the other, to Brexit plans as reasons behind the strong finish to the year.
“All consumer stocks rebounded due to the growing view that Johnson would win,” Enders Analysis analyst Claire Enders said, adding that there was also the realization that “underlying negative trends on advertising will improve relative to what could have been disaster in the summer. Hard Brexit could cause a 10 percent to 15 percent drop in TV advertising.”
But where will the stock go from here? That is up to much debate among analysts. Several have recently reiterated “neutral” or equivalent ratings on ITV’s stock, including Barclays at “equal weight” and UBS at “neutral,” while Bank of America even has an “underperform” rating on the stock. And Credit Suisse in November raised its price target by 5 pence to 175 pence ($2.29) with an “outperform” rating.
Liberum Capital analyst Ian Whittaker has been among the more bullish observers. He had in September, in a report titled “Brexit, Brexit, Brexit…,” already raised his target price on ITV’s stock from 145 pence to 180 pence ($2.36). “We feel (famous last words), for 2019 at least, there may be an end to the advertising downgrades,” which had been driven by Brexit worries, he wrote, adding that government spending on advertising for Brexit could benefit ITV’s fourth-quarter results, which the company is expected to report in early March, “significantly.”
Added Whittaker: “Our view is also that, politically, an endgame on Brexit seems to be approaching and that the elimination of uncertainty itself may help ITV as advertisers are better able to plan ahead. He reiterated his “buy” on the stock.
Still, ITV’s stock at the end of 2019 remains well below its 2015 high of 280.70 pence ($3.68), and some observers have raised concerns about 2020.
“We expect first-half advertising to benefit from a bit of post-election positivity, but for more nervousness…as we get closer to the actual Brexit departure,” Berenberg analyst Sarah Simon tells THR. But she also predicts that investor focus would shift to the U.K.’s streaming service, which ITV launched with the BBC late in the year. “Clearly, the big thing for 2020 is going to be BritBox and how it gets on,” she says.
In a recent report, Simon reiterated her “hold” rating and 125 pence ($1.64) price target on ITV’s stock, arguing that one risk for ITV investors in the new year could be that “2019 results [are] taking from 2020.” Explained the analyst: “Advertising looks set to be down circa 2 percent on a full-year  basis, and circa 10 million pounds ($13.1 million) of programming costs will now slip into 2020. Meanwhile, ITV Studios has benefited from the phasing of higher-margin (i.e., drama/format) revenue, more of which looks likely to fall into 2019 than in 2020.”
Two seasons of Hells Kitchen, Snowpiercer and Love Island boosted ITV Studios this year. However, the unit’s 2020 profit “will probably be broadly flat, which is worse than consensus previously assumed,” she explained.
“Consequently, while we think 2019 profits are well supported, 2020 numbers look too high,” Berenberg concluded, adding: “Advertisers have not thrown in the towel, but we see risk to the market’s flat advertising assumption for 2020.” All in all, she sees a risk that analysts will over time reduce their 2020 expectations, potentially hurting the stock.
And while management is bullish on the outlook for BritBox, Simon is wondering if ITV’s streaming play will meet much demand. “We continue to believe that the BritBox video on demand (VOD) service is too little, too late,” she argued, adding that “choosing a pay VOD monetization creates fundamental conflicts with the strategy of maximizing a free-to-air audience.”
Enders is a bit more positive, telling THR: “It’s obviously very early days for Britbox outside of the USA, but the hopes are that it will not bleed ITV too badly. The USA Britbox is fine without being anything huge.”
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