Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at Barclays (LSE: BARC) (NYSE: BCS.US) to ascertain if its share price can return to 790p.
Initial catalyst
Of course, before we can establish if Barclays can return to its all-time high of 790p per share, we need to establish what caused it to reach this level in the first place.
It would appear, like most of its banking sector peers, Barclays reached this high at the beginning of 2007, just before the financial crisis. That being said, even though Barclays was trading at a record high, the bank was only trading at a historic P/E of 11 as Barclays earned 71.9p per share during 2006.
Nonetheless, within a year of reaching this high, Barclays’ share price had dropped nearly 50%. Within the space of two years these declines had accelerated to 92% and Barclays shares traded a disappointing 64p.
But can Barclays return to its former glory?
Unfortunately, like many of its banking sector peers, Barclays has been forced to issue a large amount of stock to bolster its balance sheet as a result of the financial crisis. This is going to make it harder for the company to return to the level of profitability, on a per-share basis, which it achieved during 2006.
Indeed, for full-year 2012, Barclays reported nearly £7 billion in profit before tax for the period, similar to the figure of £7.1 billion reported for full-year 2006 — right before the banks share price shot to 790p.
Still, with a greater number of shares in issue, Barclays’ earnings per share for 2012 were only half the level reported for 2006. This indicates that Barclays will have to generate nearly £14 billion in pre-tax profit before its earnings per share reach 71.9p.
What’s more, my calculations above do not include the impact of the recent rights issue. All in all, this indicates to me that Barclays is unlikely to generate enough profit to support a share price of 790p.
That being said, Barclays is now a bigger bank than it was back during 2006, with assets of nearly £1.5 trillion reported at the end of 2012. In comparison, the bank only reported assets of just under £1 trillion at the end of 2006.
Foolish summary
Overall, although Barclays is now a bigger bank than it was back during 2006, the company is going to find it hard to generate enough profit to justify a 790p share price.Â
So, I feel that Barclays cannot return to 790p.Â