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ITV shares hit by broker downgrade

Shares in the TV production company are down 40% since February

Shares in ITV fell 3.5% on Monday following broker downgrades. Analysts at Berenberg Bank halved their price target on the shares from 128p to just 64p and cut their rating on ITV from hold to sell.

Analysts there expressed concern about the broadcaster's current focus on streaming and said that consensus earnings forecasts are currently too optimistic.

"On our below-consensus estimates, ITV trades at 10x 2023 P/E, which is a substantial premium to other broadcaster peers," the analysts wrote.

ITV announced at its full-year results in March that it plans to invest £1.23 billion in its streaming business this year and £1.35 billion in 2023. Since then, the shares have halved in value.

Streaming TV wobble

Streaming channels are seeing a slowdown in growth. Netflix announced yesterday that it has lost 200,000 subscribers for the first time in a decade and expects to lose 2 million. Meanwhile, Warner. Discovery recently launched CNN+ to much fanfare and a $300m investment. However, just two weeks after its launch Discovery executives have halted the marketing spend on the project.

Indeed, research by Kantar recently found that the majority of consumers subscribe to just 2.3 streaming channels.

The cost of living crisis, with inflation at a 30-year high and rising energy prices will have many consumers weighing up their monthly outgoings. Items like these that may once have been seen as essential during lockdown may now be viewed as luxuries, which can be dispensed with to save cash.

While analysts at Berenberg said they appreciated ITV’s need to invest further online, they feared that management was “unrealistic” in believing it would not hit use of its linear channels.

"Meanwhile, the extra content spend that ITV has announced, while significant for ITV, is miniscule when compared to the budgets of the streaming giants, some of which are already shifting to an advertising monetisation strategy," the analysts commented.

Indeed, Netflix and Disney are both launching advertising-funded versions of their popular streaming services, while Netflix says it will cut its spend on programming.

ITV shares slump

ITV’s shares have performed disappointingly this year, slumping 40% to 74.24p since February. This is thought to be due to its decision to invest so heavily in streaming. Its streaming channel ITVX launches in the fourth-quarter. Management at the company believe it will eventually help double digital sales to £750m by 2026.

ITV’s financial results were strong, with revenue up nearly a quarter to £3.5 billion in the full-year and pre-tax profits up to £480 million from £325 million. Earnings before interest, tax and amortisation (EBITA) rose 42% to £813 million, boosted by cost cuts and a recovery in the advertising market.

In fact, total advertising sales were up 24% to their highest levels seen in the company’s history.

The successful launch of ITVX could help revive the share price. And, at these depressed share price levels, it’s possible ITV could become a takeover target. Investors will be looking to the first-quarter trading update due on 11th May.

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