Upcoming Advertising Restrictions And Debt Will Pressure Future Earnings

Key Takeaways

• Planned cost-cutting and resource reprioritization may strain operations, impacting net margins if savings do not align with targets amid rising costs.
  
• Increased digital focus requiring investment could pressure net earnings if traditional revenue declines outweigh digital growth.
  
• Diversification and digital growth strengthen ITV's resilience and profitability, reducing dependency on traditional ad revenue and boosting margins.

Catalysts

An integrated production, broadcasting, and streaming company, which creates, owns, and distributes content on various platforms worldwide.

• ITV's planned cost-cutting and reprioritization of resources may lead to strained operational capabilities if these savings do not meet expected targets. This could impact net margins adversely if costs rise unexpectedly.
  
• Increased focus on digital revenue streams like ITVX and Zoo 55 requires sustained investment to remain competitive, which could pressure net earnings if digital growth does not offset declines in traditional revenue streams.
  
• The uncertainty surrounding advertising restrictions on less healthy food, set to be implemented in October 2025, may result in reduced ad revenue or require significant adjustments in revenue generation strategies, potentially impacting total revenue.
  
• Despite expectations of growth in the scripted and unscripted markets, the recovery and expansion in these areas may be slower than anticipated due to ongoing shifts in streamer content budgets, potentially leading to variability in studio revenue and impacting profit margins.
  
• High levels of debt and the maturing bond obligations may increase the finance cost in a rising interest rate environment, which could pressurize net earnings if earnings growth does not offset these cost increases.

ITV Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ITV's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.7% today to 6.5% in 3 years time.
• Analysts expect earnings to reach £239.6 million (and earnings per share of £0.07) by about March 2028, down from £408.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 7.4x today. This future PE is greater than the current PE for the GB Media industry at 12.1x.
• Analysts expect the number of shares outstanding to decline by 3.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

ITV Future Earnings Per Share Growth

Risks

• ITV continues to diversify its income streams, making its business more resilient. This diversification could positively impact its revenue and net margins, reducing reliance on traditional advertising revenue.
  
• ITV’s Studios division has shown strong performance, even during challenging times like U.S. strikes, highlighting its resilience and potential for growth in revenue and earnings through its diversified and high-margin catalog of content.
  
• The ITVX platform has outperformed expectations, with digital viewing and revenue showing strong growth. This indicates potential for increased digital advertising revenue and has led to improvements in EBITA margins.
  
• ITV's financial discipline, including cost savings and efficiency programs, has resulted in higher EBITDA margins and strong cash generation, positively impacting overall profitability.
  
• Investments in growth areas such as data, technology, and digital capabilities position ITV well for future opportunities, potentially enhancing revenue and earnings through expanded digital and international markets.

Valuation

• The analysts have a consensus price target of £0.87 for ITV based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.15, and the most bearish reporting a price target of just £0.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £3.7 billion, earnings will come to £239.6 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of £0.81, the analyst price target of £0.87 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.