Barclays share price has risen 77% since October – is it still worth anything?

Barclays‘ (LSE: BARC) The share price has risen 77% since its 12-month low of £1.28 on October 30. However, this does not mean that the stock no longer has any value.

It could be that the market has only just realized the true value of the shares. And it could be that the share price still does not reflect its fair value.

How much room for further profits?

Barclays’ most important price-to-book ratio (P/B) for stock valuation is 0.5. This is favorable compared to the average P/B ratio of 0.7 of its competitors.

This group includes Standard Chartered (also at 0.5), NatWest at 0.7, and both HSBC And Lloyds at 0.8.

The same relative undervaluation of Barclays is also reflected in the price-to-sales ratio of 1.4. The average of the peer group, however, is 2.

To determine how much room there is for further share price gains, I have performed a discounted cash flow analysis, which shows that the stock is undervalued by 26% at its current price of £2.26.

A fair value for the shares would therefore be £3.05. The price may go lower or higher, but it underlines how much value still lies in them.

The bank’s new vision

In my view, Barclays’ price increase since October has been largely due to the company’s new strategy to be a “simpler, better and more balanced” company.

This includes the sale of non-priority business areas (including the German consumer credit business) and the development of the corporate and investment banking business.

On July 4, the bank announced the sale of its German business. On July 10, it was reported that it plans to quadruple its private banking assets in Asia by the end of 2028.

This vision aims to deliver a return on equity (RoTE) of over 10% this year and over 12% in 2026. It also plans to return over £10 billion to shareholders in the form of dividends and share buybacks between 2024 and 2026. Both rewards tend to encourage rising share prices over the long term.

In its full-year 2023 results, it achieved a RoTE of 10.6% and share buybacks totaling £1.75 billion. It also increased its annual dividend from 7.25p to 8p and announced a new share buyback worth up to £1 billion.

The story goes on

Analysts expect Barclays’ earnings to grow by 11.9 percent annually through the end of 2026. Earnings per share are expected to rise by 16.4 percent annually by then.

Time for me to buy the shares?

So far, it seems to me, Barclays’ new vision has been implemented. However, like all shares, the stock also carries risks.

A major mistake in any of the many moving parts of the restructuring could prove very costly. In addition, the ongoing UK retail banking business is facing shrinking margins as interest rates fall along with inflation.

However, none of these factors bother me enough to prevent me from buying the stock.

Both the Indian and Singaporean economies (the focus of Barclays’ expansion in Asia) continue to grow strongly. And inflation and interest rates are cyclical – they will undoubtedly rise and then fall many times from now on.

If I didn’t already own shares in two banks (HSBC And NatWest), I would buy Barclays shares today. They still seem to have a lot of value, and I think further gains are likely given the bank’s strong growth prospects.

The post Up 77% since October, is there anything left in Barclays’ share price? appeared first on The Motley Fool UK.

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HSBC Holdings is a promotional partner of The Ascent, a Motley Fool company. Simon Watkins has positions in HSBC Holdings and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc and HSBC Holdings. The views expressed on companies mentioned in this article are those of the author and may therefore 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.

Motley Fool UK 2024