Despite the fact that they’ve significantly underperformed the market over the last decade, Lloyds (LSE: LLOY) shares remain a very popular investment today. Clearly, many people continue to believe that at current levels, they’re capable of generating big gains.
Do the shares – which currently trade for less than 60p – have the potential to double in price in 2025? Let’s take a look.
Looking cheap today
From a valuation perspective, Lloyds shares do look cheap at the moment.
One metric that’s frequently used to look at value is the price-to-earnings (P/E) ratio. This tells us the price of a stock per £1 of earnings (profits) and allows us to compare the valuations of different companies.
Currently, City analysts expect Lloyds to generate earnings per share (EPS) of 6.71p for 2025. So, at a share price of 54p (the share price as I write this), the P/E ratio is eight.
That’s a relatively low multiple. It’s well below the market average, which suggests that there could be some value on offer.
Another metric that can be used to assess value is the price-to-book ratio. This ratio – which is often used for bank stocks – tells us the price of a stock per £1 of book value (assets minus liabilities).
Currently, Lloyds has a price-to-book ratio of about 0.7. Again, that suggests that there’s some value on offer.
Can they surge next year?
The thing is, while the shares look cheap, I don’t think they’re cheap enough to be able to double in 2025. Looking at the current ratios, I can’t see the shares rising to 108p.
If the share price was to double, we’d be looking at a P/E ratio of around 16, assuming no change in EPS forecasts. That would be a very high earnings multiple for Lloyds.
To put that figure in perspective, America’s JP Morgan currently has a P/E ratio of about 14. And it’s generally regarded as one of the best banks in the world (it has a much better long-term track record than Lloyds does).
Another reason I believe they’re unlikely to double is that the shares are generally seen as a proxy for the UK economy (since Lloyds is a domestically-focused bank). In other words, when the economy is strong, the share price tends to rise, and vice versa.
I’m not expecting the UK economy to be particularly strong next year. Currently, the International Monetary Fund (IMF) is forecasting UK GDP growth of just 1.5% (versus 3.2% for the global economy).
This backdrop could limit gains for Lloyds shareholders. If the economy takes a turn for the worse, investors could even be looking at share price losses.
Potential for solid returns
Now, I’ll point out that I believe Lloyds shares have the potential to generate solid returns next year.
Currently, the shares offer a dividend yield of around 6%. So, if the price rose to 60p, investors could be looking at total returns (dividend income plus gains) of around 17%.
But I don’t think a 100% share price gain is on the cards. I think anyone looking for a double should focus on other stocks and The Motley Fool could be a great source of ideas here.
This post was originally published on Motley Fool
