Barclays’ (LSE: BARC) share price is trading near its 12-month high of £2.98, which was reached on 21 January.
This does not mean the stock has no value left though. It could be that the bank is just fundamentally worth more than before.
Or the market could simply be catching up to its true value. Indeed, it may be that this true value is still not fully reflected in the current share price.
To find out which is applicable to Barclays, I ran a deep dive analysis into its price and the issues surrounding it.
Share price valuation
The UK ‘Big Four’ bank currently trades at a price-to-earnings ratio of 10. This is top of its peer group, which averages 7.9. These competitors comprise NatWest at 7.5, Standard Chartered at 7.8, HSBC at 7.9, and Lloyds at 8.4.
So, it looks overvalued on this basis.
However, on the price-to-book ratio Barclays presently trades at 0.6. Its competitor group average is 0.8, so it is undervalued on this measure.
It is also undervalued on the price-to-sales ratio, trading at 1.8 against a 2.3 peer group average.
To get to the bottom of the pricing, I ran a discounted cash flow analysis. In Barclays’ case, this modelling shows its shares are 26% undervalued at their current £2.89 price. Therefore, the fair value of the stock is technically £3.91.
They may trade lower or higher than that based on varying market forces, of course. However, it confirms to me that the shares may be a bargain right now.
Core business outlook
A risk for Barclays is the recent decline in UK interest rates and the possibility of additional falls to come. This might further affect its net interest income (NII) – the difference between the interest made on loans and deposits.
However, in its Q3 2024 results it upgraded its full-year 2024 NII target to above £11bn from around £11bn. For Barclays UK, the NII forecast is now around £6.5bn, from around £6.3bn.
These upgrades have resulted partly from a shift towards fee-based – rather than interest-based – business. And it has also followed an ongoing hedging programme. This aims to offset the effects of interest rate reductions through various financial instruments. Indeed, to the end 2026, Barclays targets total income of around £30bn.
Analysts forecast its earnings will increase by 10.86% each year to the end of 2027. And it is ultimately these that power a firm’s share price and dividend higher.
Another boost may come from the Bank of England’s current efforts to persuade the government to reduce banks’ regulatory requirements to help boost economic growth.
Will I buy the shares?
I already have holdings in HSBC and NatWest, bought a considerable while ago. So, adding another banking stock to my portfolio would negatively skew its risk-reward balance, I think.
However, if I had a larger portfolio or did not have two banking stocks in mine, I would buy Barclays’ shares today.
Central to my view is its strong earnings growth forecasts in the coming years. These should push the share price much closer to fair value, in my view. It should also prompt a rise in its dividend yield, I think.
This post was originally published on Motley Fool
