Goldman Sachs downgrades ITV, highlights risk of reinvestment

Goldman Sachs downgraded ITV to ‘neutral’ from ‘buy’ and cut the price target to 297p from 329p on the back of a softer advertising outlook and ongoing rating weakness that it said could weigh on programming costs.

The bank noted that since being added to the ‘buy’ list on 12 October, 2009, the stock is up 432% versus the FTSE World Europe up 9.8%.

GS continues to the see the broadcaster as structurally well positioned compared to its peers, given its exposure to content (30% of revenue) and strong management.

It said that over time, ITV should benefit from the rising value of content and the convergence between telco and media, which makes it a potential M&A target.

However, in the near term, Goldman highlighted the risk to advertising and programming costs, which could materialise at the full year results this week.

It said soft ratings – the ITV audience is down 4%-5% in 2014/15 – the end of major shows and the change of the Director of Television could result in greater programming reinvestment in the near term.

The bank raised its estimates for programme costs by £12m to £1.05bn as it reckons ITV will reinvest to compensate for the end of programmes such as Downton Abbey or Mr Selfridge and the softness of other key shows, such as the X Factor.

GS cut its 2016 earnings per share estimate by 5% as a result to 17.8p, versus consensus of 18p.

It said that while the stock’s valuation is not expensive, there is more limited near-term upside given the lack of major positive earnings momentum and the de-rating of US peers.

At 0942 GMT, ITV shares were down 1.7% to 247.70p.