Massively undervalued

Barclays (LSE: BARC) shareholders are going through yet another tough year. Annual pre-tax profits fell 8% last year, and shares in the bank have lost 22% of their value since the start of the year. What’s more, the income that shareholders crave, in the form of dividends, has been cut by 54%, to just 3p a share for 2016.

But while it is true that these recent trends seem a worrying sign that profitability will remain weak for some time, I believe the firm is firmly set on a path to recovery. Barclays has made tremendous progress to wind down its “bad bank””— non-core risk-weighted assets (RWAs) have been almost halved over the past two years — and the bank has put many of its legacy misconduct and litigation issues behind it.

Profits from core franchises, its UK retail bank and Barclaycard, are chugging along nicely, up 6% and 18%, respectively. Its investment bank will take longer to repair, but there are signs of progress. The division’s return on equity was just 5.6% in 2015, but attributable profits doubled to £804m.

Shares in Barclays seem massively undervalued, trading at just 0.46 times book value. On earnings, valuations are attractive too. City analysts have a consensus forecast for underlying EPS of 14.4p, which would give its shares a very agreeable forward P/E of 11.9.

In the following year, earnings is set to bounce back strongly, with forecasts of underlying EPS of 20.7p. This represents a 44% increase on its 2016 estimate, and would mean its forward P/E would fall to a remarkably low 8.3 times.

Growth still healthy

Equipment rental firm Ashtead Group (LSE: AHT) has a great track record of delivering growth. Between 2011 and 2015, underlying operating profits grew by a compound annual growth rate (CAGR) of 54%, while revenues expanded by a CAGR of 21.1%.

Looking forward, Ashtead will struggle to grow earnings as quickly, while the construction sector enters the slower growing mid-cycle phase. But I’m still bullish that Ashtead’s future earnings will continue to grow at a healthy rate. The firm has a strong focus in the speciality sector, where low rental penetration means there is opportunity to grow market share. Furthermore, margin expansion from improved operating efficiency will likely offset some of the impact of a slowdown in revenue growth.

City analysts seem to agree. The consensus forecast for this year’s underlying EPS growth is 28%, which would give its shares a forward P/E of 12.1. By 2017, its forward P/E could drop to 11.1, on forecasts of another 8% increase in earnings. I reckon this is decent value given Ashtead’s attractive growth outlook.

Catch up on margins

Ashtead’s small-cap rival Vp (LSE: VP) could be poised for more sizeable returns. Vp’s greater focus on the UK market means it’s better placed to benefit from a growing housebuilding sector and a potential pick-up in water infrastructure spending, in line with the industry’s new five year asset management programme.

Vp is not as profitable as its larger rival – Vp’s EBITDA margins is 28%, compared to Ashtead’s 47% – but this means there’s room for Vp to catch up on margins. This is particularly important now, because in a slowing market, improving operating efficiency and asset optimisation become more valuable drivers of growth.

Vp trades at a slight premium to its larger peer, with shares trading at 12.7 times 2015/6 earnings, and 11.9 times 2016/7 expected earnings.

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Jack Tang has a position in Barclays plc. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.