In a falling market, broadcaster ITV is steady at 31p after a couple of positive reports on the business.
JP Morgan said the market had priced in the negatives surrounding the company, but not the positives, and the shares could go as high as 74p. And UBS, the ITV broker, has also raised its target price, albeit more modestly from 20p to 34p. Firstly, here's JP Morgan:
"We have been the first in the market to upgrade ITV to overweight this year. Our positive view on the stock remains contrarian after the publication of the first quarter 2009 trading update by ITV.
"ITV's share price assumes no improvement in advertising in the second half of 2009. We assume in our model that ITV's advertising year on year growth profile improves in the second half of 2009 compared to the first.
"[The share price also] assumes no benefits from cost cutting. At the last trading update ITV announced additional cost savings of £40m from 2010 leading to total cumulative cost savings of £215m in 2010 and £285m in 2011. We currently assume £110m in 2009 and no additional cost reduction in 2010 and 2011. We assume, however, a slight advertising recovery in 2010 and 2011. If we assume management's new cost cutting guidance in our model, we would increase 2009 earnings per share from 0.65p to 1.46p and 2010 earnings per share by 86% from 2.37p to 4.4p; we would increase our 12-month price target from 49p to 74p, giving 140% upside to ITV's current share price.
"We conclude that at the current share price the stock is pricing-in a negative scenario on advertising (no improvement in the second half of 2009) but not the positive of the cost reductions."
UBS is also more positive on the prospect of a recovery in advertising. It said:
"Analysis of past cyclical slowdowns in the 1970's and 1990's suggest it takes two years for advertising to trough after its peak, and a further three years to fully recover the lost revenues. Overlaying past slowdowns suggests that consensus forecasts are far too conservative, particularly given ITV's operational gearing.
"If ITV's downturn had been purely cyclical in nature, we would expect double digit ad growth and more than 100% of upside to ITV's equity in a recovery. However, in reality, we believe a large part of the decline reflects permanent structural erosion of ITV and the TV market. We forecast just 3.9% TV market growth in 2009-12 even after assuming a full recovery of the 'cyclical component' of the downturn.
"We have adjusted our forecasts to reflect a steeper ad recovery. We also factor in the dilution from the sale of SDN, and additional cost savings. [Our estimate for] 2010 earnings per share is upgraded to 1.95p from 0.62p,
and by 88% and 65% in 2011 and 2012, respectively. Our forecasts are more than 50% above the consensus."Given the prospect of flat/declining earnings post 2012 as a result of ongoing structural pressures and our assumption of slower growth in consumption/advertising, we believe that ITV is fairly valued. We maintain or neutral rating with a scenario based price target of 34p (up from 20p)."
