Barclays (LSE: BARC) (NYSE: BCS.US) shares still have a long way to go to regain the levels they were at before the banking sector was crushed by the credit crunch.
And although the sector is edging its way back to respectability, the Barclays price doesn’t seem to have noticed it yet — in fact, despite strong forecasts for the year to December 2014, which would see earnings per share (EPS) rising by more than 50% to 25.7p and the dividend hiked by 30% to 8.5p per share, the share price has fallen by nearly 20% over the past 12 months.
Lowly valued
On the latest price of 243p, the mooted 2014 EPS figure would suggest a price to earnings (P/E) ratio of only around 9.3, and that’s way below the current FTSE average of 14. And the predicted dividend would provide a yield of 3.5%, which is bang on the index’s average.
I think that’s way undervalued, and the majority of analysts seem to agree with me — 14 out of 28 currently forecasting have Barclays shares rated as a Strong Buy, with all bar one of the rest sitting on Buy or Hold.
So what’s a more realistic valuation for Barclays?
What’s it worth?
I think a long-term P/E ratio of around the average 14 is probably about right for the big banks, and to achieve that by the end of 2014 (assuming the forecasts turn out to be close to the truth), we’d need to see the price reach 366p — and that would be a gain of 50% on current levels!
But what’s more, forecasts for 2015 suggest more of the same. EPS is not expected to grow quite as fast, but the prediction of 24% is still pretty nice.
And the dividend should hopefully be boosted by around another 40% to take it to 11.8p per share, which at today’s prices would provide a FTSE-busting yield of 4.9%!
What does that suggest as a realistic share price? The forecast 31.7p EPS for 2015 would bring the P/E down from this year’s 9.3 to just 7.5 — and if you think that’s way too cheap, I fully agree with you.
To reach that average P/E of 14 by the end of 2015 (again assuming forecasts are good), the price would have to soar by 86% to 454p.
Great potential
Now, if I were to see that kind of price rise over five to ten years in one of my investments I’d be pretty happy, especially if I got to pocket dividends approaching 5% along the way. But over two years!
Barclays, of course, may well continue to be tainted with the banking fallout for a little while longer, but markets will be markets and the price is pretty much certain to revert to usual long-term valuations — and I reckon there really is scope for that doubling.