Recovery in store for ITV and BAE Systems?

While the FTSE 100’s 1% gain in the last year may seem disappointing, a number of its constituents have recorded significant share price falls.

Among them are ITV (LON:ITV) and BAE Systems (LON:BA.). The two stocks have declined by 15% and 18% respectively in the last 12 months. Although their outlooks may be uncertain, they could post sound recoveries in the long run in my opinion.

Changing strategy

The recent results from ITV highlighted the challenges that the company is facing. A weak outlook for the UK economy is causing the TV advertising segment to experience a difficult period. This is causing lacklustre sales and profit growth to be reported. In turn, this is leading investors to become increasingly bearish about the company’s investment prospects.

ITV, though, is in the process of delivering a revised strategy. This will see it broaden its appeal to include a repositioning of its brand, the increasing use of data and digital opportunities, as well as an expansion of its direct-to-consumer activities. This strategy is being complemented by a cost-saving initiative which is due to make the business more efficient over the medium term.

There has also been encouraging performance from the company’s Studios division. Its planned release of Britbox (a collaboration with the BBC to offer streaming services) could catalyse its investment performance and lead to improving financial prospects – particularly as the UK’s economic outlook improves over the long run.

Growing industry

BAE’s share price fall has largely been due to fears surrounding its future financial prospects. In its recent update it highlighted the potential threat to its business from the geopolitical risks which surround Saudi Arabia. Since the kingdom is one of its key customers, further negative news flow surrounding its future prospects in terms of trade could lead to additional volatility for the company’s share price.

The wider defence industry, though, is expected to deliver an improving growth rate in future years. The US has increased its defence budget, while other NATO members are expected to do likewise as they seek to meet their responsibilities with regard to spending 2% of GDP on the military.


Continued geopolitical risks across a variety of regions mean that defence spending is forecast to increase at a faster pace in future. In fact, having risen by just 5% in the last eight years, defence spending is due to increase by 14% over the next four years. This could act as a tailwind for defence-related companies and boost BAE’s financial performance.

Valuations

Since ITV and BAE have both recorded significant share price falls, they now trade on P/E ratios of 9 and 10 respectively. This suggests that they offer margins of safety, as well as good value for money. While further risks could be ahead in the short run, they may deliver improving investment outlooks over the long run.