The Barclays (LSE: BARC) share price has had a good run, climbing 42.89% in the last 12 months. Given its storming success, I expected it to be expensive. Yet its current price-to-earnings ratio is just 8.19, roughly half the FTSE 100 average of 15.4 times.
The shares also look cheap judging by the price-to-book ratio, which stands at just 0.5. That’s exactly half the figure of 1 that’s seen as fair value. This suggests Barclays has more room to grow.
Of course, metrics like these are far from infallible. Financial services stocks have looked underpriced for years. The financial crisis still casts a shadow. Post-Brexit negativity about the UK economy didn’t help. Nor did the cost-of-living crisis.
The shares still look cheap
While rising interest rates boosted banks’ net interest margins, a key measure of profitability, they also made investors fret about a recession and rising debt impairments.
I’ve felt for some time that the negativity has been overdone. Especially since the UK recession was relatively short-lived, house prices didn’t crash, and the banks’ debt impairment provisions weren’t needed.
FTSE 100 banks have had a good year generally. The NatWest Group share price is up 41.22% over 12 months. Lloyds Banking Group shares are up 31.03%. Both look cheap too, trading at 6.83 and 7.64 times earnings respectively.
Some investors reckon the discounted cash flow (DCF) method is the best method of judging a stock’s potential. On this score, Barclays looks tip-top, undervalued by 68%. That compares to 60% for Lloyds and 39% for NatWest.
Judging by these various metrics, Barclays shares could have a lot further to go. Again, they’re not infallible. We may just have to accept their lower valuations, and look for better measurements of their potential.
Brokers remain optimistic about Barclays. Analysts covering the stock have set an average 12-month price target of 272.3p. That’s up 20.26% from today’s price.
Banks are much less riskier than they used to be, having built solid capital buffers since the financial crisis. During last year’s banking meltdown, the sector was an oasis of calm.
Riskier stock, but more rewarding
Yet Barclays carries a bit more risk than Lloyds and NatWest, because it still retains an investment banking arm. That ups the potential rewards too. I hold Lloyds shares but sometimes wonder if they’re a little stolid.
One downside of the recent Barclays shares surge is that the yield is pretty so-so at 3.53%. Markets forecast this will hit 3.84% in 2024 and 4.16% in 2025. It’s still not to-die-for though.
In 2023, Barclays posted full-year sales of £25.38bn. Worryingly, growth looks sluggish with analysts forecasting only a small hop to £25.88bn this year, and then a bigger jump to £27.36bn in 2025.
The shares are also at the mercy of macro factors such as the state of the global economy and how fast central bankers cut interest rates. Lower rates will squeeze margins, which have already started to fall, especially in the mortgage market where competition is intense.
I’d happily buy Barclays shares despite these risks. The only thing holding me back is that I already have plenty of exposure to this sector through Lloyds.
This post was originally published on Motley Fool
