… The media sector is a classic early cycle investment, where any pick up in sales can represent a significant increase in earnings. In this vein I believe ITV is a contrarian turnaround play.
A glance at the above chart of the FTSE 100 highlights the continued strength experienced in equity markets this week.
Robust third quarter earnings and encouraging global economic data helped push the Dow Jones Industrial Average through 10,000. The DOW has rallied around 55% off its March lows and the break of this psychologically important level could facilitate further risk appetite.
The earnings season has started strongly, with most bellwether companies beating forecasts, which in turn has raised the bar on expectations going forwards. JP Morgan took centre stage as it unveiled a surge in third quarter net income and stated that it hopes to raise its dividend back up to $0.75 per share in the first half of 2010.
An improvement in global economic data has also helped to boost sentiment, with a smaller than expected rise in UK unemployment and a bigger than expected increase in US retail sales in September. The US consumer remains crucial to the fortunes of both the US and the global economy and the latest numbers suggest that consumers are spending money again as we move into the holiday shopping season.
Technical analysis shows that even though the upward channel formation experienced in Q3 was broken, the blue chips found support from the 50 day exponential moving average (EMA) and the inherent momentum has continued to drive us higher.
The fresh high indicates that the upward trend remains intact, which improves the longer term outlook and will increase the confidence on any move lower, as buyers are likely to continue buying on any weakness.
However, the divergence of the relative strength index (RSI) is worth noting as it has failed to move in line with the underlying index, which suggests that the momentum behind the recent buying remains low.
In summary, confidence has been given a further boost this week, with the Vix volatility index of US equity volatility reaching a 13 month low of 21.55. The upward trend has been resumed and fighting this trend remains a dangerous call. However, as the reporting season gathers pace the corporate news flow is likely to remain the dominant force over the next few weeks and as expectations are scaled higher it will increase the scope for disappointment.
Media companies have outperformed the wider market over recent weeks, with the sector average gaining around 8% in the past month. A related stock I have been following closely is UK commercial broadcaster ITV (Epic: ITV).
The group released an encouraging update this week, stating that the TV advertising slump is beginning to ease and that it is on track to outperform expectations this year. It only expects a 3% decline in advertising revenue in October and November from a year earlier, the smallest fall since the start of the recession and suggested that the outlook is improving into 2010.
The group also noted the appointment of an interim CEO, which should bring some short-term stability to the management front. After recent disruption to the board, chief operating officer John Cresswell will lead the company until a suitable permanent replacement is found.
ITV announced it is raising £135 million through a convertible bond issue, which will extend the maturity of its debt and strengthen the balance sheet. It also scrapped the sale of SDN, its digital terrestrial channel operator, so it can use the business as asset backing for the pension scheme.
High levels of debt and rights issue fears have surrounded the company over recent months and at the half year mark net debt stood at £728 million, which is a hefty load for a company whose revenues have fallen substantially. However, ITV’s next debt repayment of around £140 million is due in 2011 and is adequately covered by the £476 cash held at the end of June 2009. It has repeatedly said it has no plans for a rights issue and hopefully a stabilising pension deficit, a more favourable debt profile and an improving outlook could mark a turning point for the shares after years of underperformance.
The media sector is a classic early cycle investment, where any pick up in sales can represent a significant increase in earnings. In this vein I believe ITV is a contrarian turnaround play.
As can be seen from the above chart of ITV the shares lost around 85% of their value over the last three years, reaching a low of 16.5p in March of this year. Since then the shares have steadily recovered and appear to be trending higher within an upward channel formation.
The RSI is rising and has broken above 50, which suggests that the momentum is building and is often regarded as a buying signal. The moving average convergence divergence (MACD) histogram, which is a trending indicator, is also stepping higher and has broken into positive territory, with the moving averages crossing over and rising, it indicates that the trend is higher.
ITV is a geared play based on an advertising recovery and the recent appointment of the new interim CEO should help alleviate many concerns. If we combine this with our earlier analysis of the FTSE 100, I believe the shares could trend higher over coming weeks.
At the time of writing the share price is 50.45p and my short term opinion is higher. Near term targets are seen at 53p, 54.75p and 61p, with a stop loss at 47.25p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in ITV. The material in this report has come from Simply Charts and ITV’s corporate website.