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What ITV and M&S said next...

By Chris Bailey | Wednesday 7 November 2018


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


So after all that midterm election excitement (the pollsters got it broadly correct for once), time to consider today's large cap highlights. Two names stand out for me: ITV (ITV) and Marks & Spencer (MKS)…

Regular readers will recall my medium-term appreciation of the business credentials of ITV CEO Carolyn McCall. She has not really delivered yet here but as I detailed at length at the time of the interim numbers in July I see some value, especially since the shares are now twenty pence lower than back then. Today's third quarter trading update has three elements to it in my view.

The good news is that it continues to win share of the family viewing/online viewing market and the studios business continues to go from strength to strength – I told you it did not need to spend large sums of money on silly purchases like Endemol. Organic revenue growth of 7% in studios spend was very decent and even though something called Snowpiercer getting pushed back into 2019 will hurt full year studios growth, the pipeline looks great with Love Island US and Sunday Night Takeaway (Australia) primed for launch.

Less good however is the advertising environment which is expected to be 'broadly flat' for the full year despite a 2% rise in the first nine months. Well Bah Humbug for Christmas spend then... More seriously we know advertising spend is generally more compressed but at least it is not falling off a cliff. Finally the nod towards a healthy balance sheet is important. I see Carolyn is going to be reunited in a few months with her old easyJet CFO which no doubt will give her even more confidence about the numbers as she continues to evolve the business towards a creative/online focus. In the meantime that punchy 8p dividend is nice and affordable and equating to a 5.4% yield back here below a 150p share price. Overall, I am still a buyer.

Now onto M&S. Back in May, I wrote a piece on the turnaround plan concluding:

'Sub 3 quid a share equates to a bottom drawer call option i.e. buy it at or below this level and I think you have a sporting chance to make some money over (say) the next two or three years. The transformation programme is absolutely the right thing to do and thinking big and radical is the key as it is a really competitive world out there. But it is a bottom drawer stock - only one to blend into your portfolio after you have a holding in those eight or ten much more compelling total return FTSE-100 stocks out there currently'

Amazingly the share price is pretty unchanged since then - and has basically gone in a sideways direction either side of three quid since I wrote the piece. That's classic bottom drawer stock behaviour. What did I think of the half-year numbers? They are the usual combination of lacklustre profits progression, ongoing cost cuts, patchy like-for-likes as store closures and pulling away from promotions occurred, squeezing cash flow with a benefit on net debt levels and the like. At least the core full year expectations were left untouched.

We all know the issues - wonderfully captured by the stat in a Sunday press article that noted "a quarter of its (M&S') £4.2bn of lease obligations relate to shops with contracts that have more than 25 years to run" - and it immediately noted on the conference call that they are deep in 'restoring the basics'. The share price reflects that we all know the key structural issues here and the 6%+ dividend yield (currently covered by free cash flow) and x11 forward P/E says this. My view remains the same as back in May. This is a bottom drawer turnaround situation to have as a bit of a large cap punt after you have put together a bunch of other more prudent/sensible large cap plays.

Online progress from a low base is fine, resonance with consumers is slowly rebuilding, it is finally embracing AI in-store and - more generally – it is a well-known name with (now) what appears a much better team and a big awareness things have got to change. The plan is 'three to five years to make M&S great again'. Given these attributes and a balance sheet which - unlike some other embattled sector peers - gives them half a chance, I would buy/hold some here below 300p a share in anticipation of some 2019-20 share price appreciation payoffs. In the meantime there is the dividend flow...and the fine range of lunchtime sandwiches 'natch too.


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