Lloyds (LSE: LLOY) (NYSE: LYG.US) is a company that I’m very bullish on and, despite the very bright long-term prospects that I believe it has, shares still look very cheap. That’s why I’m thinking of buying more.
For instance, Lloyds currently trades on a forward price-to-earnings (P/E) ratio of just 11.5 using 2014 earnings. This compares very favourably to the FTSE 100 and to the wider banking sector. They currently trade on P/Es of 15 and 16.3 respectively, thus highlighting the exceptional relative value that Lloyds offers based on P/E ratios.
Furthermore, Lloyds is coming back into the black, with the bank expected to make a profit this year for the first time since 2009. So, although there is no P/E ‘range’ data available for the last few years, a forward P/E of 11.5 is, in my view, unlikely to remain so low as the market re-rates shares upwards as Lloyds begins to increase its earnings per share in line with market forecasts.
Indeed, a low P/E ratio is not the only ratio to point to shares offering extremely good value. The price-to-book (P/B) ratio for Lloyds is also highly attractive, being just 1.22 and shows that investors are not being asked to pay much in goodwill when they purchase the shares.
Of course, Lloyds may look to reduce the size of its asset base in future years, although the planned scale of this is unlikely to push the price-to-book ratio to particularly high levels and, in my view, it should still point to good value even if net assets were to fall in the medium term.
In addition, I remain bullish on Lloyds because I feel it can be among the most profitable UK banks and offer leading returns to shareholders. For instance, return on assets in 2014 is forecast to be around 0.5% assuming that there are no further writedowns or disposals.
Although this figure may seem low, when it is put into context in terms of the journey that Lloyds has followed in recent years as well as the state of the UK economy, I believe it is respectable and shows that the bank can generate attractive returns in future years from its current asset base. This gives me encouragement as a shareholder.
So, I feel that Lloyds offers excellent value for money based on the P/E and P/B ratios, as well as generating an encouraging return for shareholders from its asset base.
