Share price movement
As PPI claims and impairments decline, investors are beginning to reappraise Lloyds (LSE: LLOY)(NYSE: LYG.US). The effect has been dramatic — Lloyds is up 41% in the last three months.
However, in the last week they have underperformed both the FTSE 100 index and similar banks. While Barclays and RBS are both trading around 4.5% higher, Lloyds shares are actually slightly down on the week.
The fading of the eurozone crisis was welcome news for all bank shares. Lloyds received an additional fillip from the slowdown of PPI compensation costs. An improvement in economic sentiment has also helped.
Of the three banks mentioned, Lloyds is the one whose fortune is most closely tied to the UK economy.
Expectations are increasing that the government will soon begin an orderly sale of its stake in Lloyds.
Sentiment
It is clear that the consensus view on Lloyds is more positive than it was a year ago. The bank has no apparent need to issue more shares and this stage of the business cycle is particularly favourable to its business mix.
There is even some clamour among fund management groups to purchase the government’s stake in the bank — a huge change from the days when the shares traded at less than half today’s price.
Valuation
According to the consensus of analyst forecasts, Lloyds will report 4.6p of earnings per share (EPS) this year, followed by a 29% rise to 6p in 2014.
That puts the shares on a 2013 price-to-earnings (P/E) ratio of 15 times forecasts, falling to 11.6 times the number for next year. On that basis, Lloyds is trading on a premium rating this year and a small discount for 2014.
The dividend picture remains unclear.
Verdict
I recently took the opportunity to sell Lloyds, reinvesting the proceeds in RBS and Barclays. While I would agree that Lloyds’ current business and capital position is superior, a lot of positivity is baked into today’s share price. As a result, Lloyds now trades on the kind of valuation not seen since before the financial crisis. Given the valuation gap, I would not want to own Lloyds today.
I’m not the only investor distancing myself from Lloyds. Top fund manager Neil Woodford has recently been talking down the attraction of the shares. To find out which companies this legendary stock picker has been buying instead, get your free copy of the Motley Fool report “8 Shares Held By Britain’s Super Investor”. Just click here to start reading this free research immediately.
> David owns shares in Barclays and RBS.