I think the Barclays (LSE: BARC) share price substantially undervalues the underlying business. Indeed, since the beginning of 2016, the stock has returned around -3%, excluding dividends. But the firm is a much stronger enterprise, with brighter growth prospects than it was nearly five years ago.
As such, I think there is a good chance the stock could be worth substantially more in five years than it is today.
Issues around the Barclays share price
Before I explain why I think the stock is undervalued, I should first explain why the shares have underperformed since 2016.
There are a host of different reasons why investors have been giving Barclays the cold shoulder. First of all, Brexit has been a massive issue for the UK financial sector. Second, low-interest rates and intense competition have weighed on bank profit margins.
And third, the pandemic inflicted considerable losses on banks as they were forced to write down the value of loans made to customers who now lack the ability to pay down their obligations.
Most of these headwinds are now in the rearview mirror. It looks as if interest rates are on the way up, Brexit has not been as bad as many analysts were expecting, and the UK economy is steadily recovering from the pandemic.
And as the world gets back to normal, analysts are expecting Barclays’ earnings to rebound during the next few years.
Profit expectations
According to current City projections, Barclays will report a net profit of £6bn this year and £4.5bn for 2022.
To put these figures into perspective, since 2015, Barclays has earned £9bn. So if the bank hits these projections, it will earn more in the next two years than it has in the past six.
Of course, there is no guarantee the firm will hit these targets. There are plenty of risks on the horizon that could jeopardise the recovery. These include further coronavirus restrictions, competition, and regulatory factors.
Nevertheless, I think these estimates show Barclays’ potential. If it meets these forecasts, the Barclays share price could potentially double over the next five years.
They also suggest the stock is undervalued at current levels. If the firm hits City earnings projections for next year, the stock is trading at a forward price-to-earnings (P/E) multiple of around 6. This is below the five-year average of approximately 12.
Undervalued
On top of this earnings figure, shares in the banking giant are also selling at a price-to-book (P/B) value of 0.5. This seems too cheap for an international lender. Some of Barclays’ international peers are selling at a P/E of 1 or more.
Based on these numbers, I think the Barclays share price is cheap. That is why I would buy the stock for my portfolio today.
While the firm’s growth is far from guaranteed, I believe the bank’s outlook should improve as the economy recovers from the pandemic. And the stock should reflect this rebound.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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