Glamping in the Gower: old media fights back

The other day I got an email from Saga Holidays promoting a holiday to Swansea Bay this summer.

With respect to my colleague David Harrison (who hails from Wales’s second city) I’m giving it a miss. Not travel safe for a Cardiff boy this summer with the two football teams crossing the leagues...

Emails like this howler make me question the whole digital-targeted advertising phenomena! I mean, Saga? Me? I’m insulted – I shop at Ted Baker for goodness’ sake. I’m edgy.

Which brings me onto ITV. In 2015 the share price hit 280p. In March it fell to 140p. Now, despite being over 50, my brain is still sufficiently functioning to work out that the price has fallen 50%. We bought ITV for the Rathbone Strategic Growth Portfolio Fund on 1 October 2015 at 248p. We felt that TV was still the best medium for brand building (an unfashionable view at the time) and ITV’s content backlog and production capability were very attractive assets that were, in our view, probably undervalued. The network has all sorts of hit shows that can be licensed around the world, from Poldark to runaway hit Love Island.

Another draw for us was from a risk management perspective. After the Brexit referendum result, ITV was one of the few UK companies still in our portfolio that was sensitive to GDP growth. We had sold almost every other locally focused business because we believed the outlook was pretty poor for the country. However, if a soft Brexit outcome is achieved we felt there could be a good chance of a re-rating.

As we now know, spending on advertising has fallen over the past couple of years as the UK economy slowed and digital advertising was seen as the only game in town. In contrast, Netflix’s share price has soared. A streamed service backed by a subscription model has been valued much more highly by the ‘street’ than an apparently outdated vehicle for advertising.

ITV became a problem child for us and caused much anguished debate every week as the price continued to fall. Many times we came close to selling. However, in the end we continued to buy more shares at lower prices. The latest batch was on 28 March, when we bought shares at 143p. Our average cost price is now 190p; today’s price is above 175p.

You might ask why we were buying more when we were considering selling. This goes to the heart of our process: maintain discipline at all times and follow your process. We don’t believe in hold, only buy or sell. If we aren’t selling, we must buy to maintain our position size and therefore conviction in a company. Put another way, if we think a company’s long-term investment case is fundamentally intact and the only thing that’s different is the price is significantly lower, you have to buy. Because it’s the same asset you wanted before except now it’s that much cheaper.

Let’s be clear we are not afraid to call time on a misjudged investment and take losses. We just sold Colgate Palmolive at a small loss following my trip to the US (see Coming to America, which will be released in the next week or so). Our conviction had been undermined by the company’s poor response to the threat of premium brands, both in the developed world and emerging markets. So buy more or sell? In this case, we sold.

So why didn’t we want to sell ITV? We were encouraged by two factors.

The first was the appointment of Carolyn McCall as chief executive. Dame Carolyn’s tenure at EasyJet was very successful despite interference from Stelios Haji-Ioannou, its founder. She took on rival Michael O’Leary and won. Ryanair had to row back on some of its more unpopular practices. And BA is still trying to react. This was someone taking over a business in a hugely competitive market and winning against all the odds. Someone worth backing.

The other point was the success of ITV Hub and the opportunities for targeted advertising here (once it’s improved a bit) in the future. Viewers of the ITV Hub (ITV’s online player) are already being shown adverts tailored to their age, where they live and what they’ve watched in the past. Late last year, ITV sealed a deal to roll out targeted advertising on smart TVs that could vastly improve the reach of this higher-value, targeted adverting. Imagine tailored ads combined with ITV’s reach via free to air television ...

In the not-too-distant future I may be watching I’m a Celebrity with my family when a clever algorithm pitches me a Saga Holiday in Swansea Bay via my smart TV. It would no doubt lead to a well-deserved ribbing from my partner Tracey and my teenage son. But it should also mean better earnings for ITV. I could live with that.