Barclays’ (LSE: BARC) share price is trading near levels not seen consistently since early August 2010.
This may cause some investors to avoid looking further into it on the assumption it cannot rise much further. Others may think it is on an unstoppable bullish ride and they would be foolish not to jump on.
Fear (the first view) and greed (the second) are two key things to be avoided in investment, in my experience. This comprises several years as a senior investment bank trader and decades as a private investor.
The factor I assess in such a situation is whether there is value left in the stock. And the primary element to appreciate here is that it can be there in abundance, even after a big price rise.
This is because price and value are not the same thing. Price is whatever the market will pay for a stock. Value is what it is worth, based on the fundamentals of the business.
I ran the key numbers and delved deeper into the business to find out where Barclays figures in this mix.
The business
Any firm’s stock price is ultimately driven by earnings growth.
A risk to these for Barclays is the intense competition in the domestic and international banking sector that may squeeze its margins. However, analysts forecast that its earnings will increase 7.2% every year to the end of 2027.
A key element in the robust earnings projections for Barclays is the rebalancing of its business. This is focused on increasing fee-based revenue rather than that based on interest rates.
This was highlighted in its 2024 results in which fee-based income from investment banking climbed 7% to £11.805bn. And fee-based income from private banking and wealth management increased 8% to £1.309bn. Overall, its income rose 6% year on year to £26.788bn while its profit before tax jumped 24% to £8.108bn.
Revenue is the total income made by a business, while profit (or ‘earnings’) is what remains after expenses are deducted.
The same positive effect was seen in Q1, with investment banking income rising 16% to £3.873bn and that from private banking and wealth management income increasing 12% to £349m. Overall in the quarter, income jumped 11% year on year to £7.7bn, while profit before tax increased 17% to £2.7bn.
So, are the shares undervalued?
The acid test of undervaluation is the discounted cash flow (DCF) model, in my view. This pinpoints where any firm’s share price should be, as derived from cash flow forecasts for the underlying business.
As such, it is a standalone result based on the fundamentals of a company, unrelated to other companies’ stock performances.
In Barclays’ case, the DCF shows its shares are 54% undervalued at their current price of £3.43. This fully takes into account the stock’s bullish performance in recent months and years.
Therefore, the fair value of the shares is £7.46.
My view
I focus on stocks with a 7%+ dividend yield. That of Barclays is just 2.5%, so it is not for me.
However, its strong earnings growth potential and successful strategic switch means it may well look too cheap to avoid considering for investors whose portfolios it suits.
