I’ve said it before and I’ll say it again, our FTSE 100 banks are cheap.
Well, at least some of them are, and I reckon Barclays (LSE: BARC) is one, after its share price has plunged more than 20% to 222p since a recent high at the end of July.
The cheapness must be in part due to the assumed cyclical nature of banks. Now that they’ve had a few decent years, and recovery is set to top out with a slowdown in earnings across the sector, investors are heading elsewhere with their cash. But there’s no sign of any faltering at Barclays itself where there’s a 24% rise in EPS expected this year. And City analysts are forecasting a further 21% rise in 2016.
Taking a look at Barclays’ basic fundamentals shows a P/E based on this year’s expected earnings of a very low 10.3, and there’s a dividend yield of a pretty average 2.9% on the cards. For 2016, that 21% EPS rise would drop the P/E as low as 8.6.
And if we assumed a longer-term stable P/E of close to the FTSE 100 average of 14, then we’d be expecting a price rise for Barclays of around the 65% mark. I’m not a great one for making such short-term predictions, but I really can see a price of around 350p-360p being fair value for Barclays in the medium term.
What other indications are there that Barclays could be in for a great 2016?
Dividend and growth too
Well, there’s a progressive dividend for starters. It’s not expected to achieve the levels of Lloyds Banking Group, which is on similar P/E multiples, but there’s a yield of 3.6% predicted for 2016 that would be more than three times covered by earnings.
Another thing is the shares’ PEG ratio, which compares the P/E to the forecast EPS growth rate. For a smaller growth prospect, investors typically look for a PEG of 0.7 or lower, while anything less than about 1 is usually considered very desirable for a FTSE 100 company. And Barclays is on a PEG of just 0.4 for 2015 full-year expectations, and the same again for 2016. And for the PEG to rise only as far as 0.7, we’d need a 75% share price rise.
The firm’s balance sheet and liquidity are looking good now after Barclays was able to attract private capital during the crunch and so avoid having to go cap-in-hand to the UK government. And it comfortably passed the Bank of England’s most recent stress test reported on 1 December – and this time it looked like it was a pretty tough test.
Strong balance sheet
On top of that, Baclays shares currently enjoy a price-to-book value (PBV) of 0.6, with net asset value of around 360p per share. A rerating that would take that PBV up to 1Â would suggest a 67% share price rise.
And we also have what is often a trigger for an uprating in the shape of new chief executive Jes Staley – the appointment wasn’t entirely uncontroversial, but under him the company’s retail banking and consumer credit divisions should prosper.
On the whole, I really can see Barclays being one of 2016’s FTSE 100 winners.