The bulls suggest plenty of upside for the shares of Barclays (LSE: BARC)Â (NYSE: BCS.US) to the end of 2017.
The British bank will soon become more profitable and earnings per share will grow accordingly, the argument goes. Dividends will steadily rise, too. So, the shares may hit 300p in less than a year, for an implied 30%-plus upside.
Well, I think bullish forecasts will have to come down at some point.
Hunting For Value In The Banking Sector
As you may know by now, I think the shares of Barclays will hit 200p by the end of the year, for an implied downside of about 12% from their current level. Downside could be greater, though.
I may be wrong about the timing, but if a strong British pound continues to rise then it will force the Bank of England to push back any key decision with regard to monetary policy. As such, Barclays and other UK will need to cut costs to add precious basis points to their operating and net income margins.
This comes at a time when dilution risk, legal risk and impairment risk all weigh on the valuation of Barclays. While a sum-of-the-parts valuation indicates a possible price target of up to 260p a share, certain units of Barclays should be valued at a significant discount to their fair value — and a few analysts have yet to come to terms with that.
Consensus
“As of Sep 26, 2014, the consensus forecast amongst 55 polled investment analysts covering Barclays PLC advises that the company will outperform the market,” according to research from the Financial Times. “This has been the consensus forecast since the sentiment of investment analysts improved on Jan 10, 2013. The previous consensus forecast advised investors to hold their position in Barclays PLC,” the FT added.
Most analysts suggest a 12-month fair price above 285p a share.
Barclays stock is down 16.5% year-to-date and has also lost 17.5% of value since 10 January 2013.
Don’t Bank On Estimates
So, are the bulls’ estimates wide off the mark?
The bulls assume that Barclays will only marginally grow revenue over time, and that itself would be an achievement if the bank continues to shrink, as it plans to do. Yet they insist that the bank’s operating profit will grow at about 15% a year until the end of 2017. Barclays also boats a strong capital structure these days, you know.
As a result, Barclays stock will comfortably trade in the region of 300p.
Not so fast.
In 2009, Barclays reported an operating income margin of 38% and a net income margin of 30%. Both margins peaked back then, and plummeted to the end of 2012. In 2009, the shares of Barclays rallied with the market and recorded a five-year high of about 351p. Barclays is expected to grow its operating profit to almost £13bn and its net income to £6.2bn to the end of 2017, which would yield an operating margin of 43% and a net income margin of 21%.
In this environment?!
That’s likely. Yeah, right(!)