The shares of Barclays (LSE: BARC) (NYSE: BCS.US) currently change hands at 214p — that’s around the level they dropped to when Dark Pool allegations emerged at the end of June. But the way I see it, the valuation of Barclays should be in line with the lows it recorded between the summer of 2011 and mid-2012. Back then, the stock traded at around 150p.
Net Income Up 974% In 4 Years?
It’s easy to forget that the net income of Barclays stood just above half a billion pounds in 2013. The year prior to that, Barclays was in the red.
Analysts are incredibly bullish about the bank’s prospects. According to some top-end estimates, the bottom line of Barclays will rise to £2.4bn, £3.8bn, £5.1bn and £5.8bn in 2014, 2015, 2016 and 2017, respectively.
Do you believe that the net income of the bank, excluding one-off charges, will grow by 974% in four years? Well, I don’t.
Stock Price Target
Barclays may be forced to pay at least a couple of billion pounds in legal settlements in less than twelve months. Barclays stock will soon be hammered, in my view.
Estimates for 2015 suggest earnings per share (EPS) will come in at 24p, or just about 10% above EPS for 2011. In the second half of 2011, Barclays stock traded in the 130p to 160p range. It hit a multi-year low that was also tested in mid-2012, when a scandal over interest-rate manipulation led to a management overhaul.
Barclays hasn’t recovered its reputation since the Libor scandal emerged two years ago, and one-off charges will continue to have an impact on its profitability. Don’t take a steep growth in operating profit for granted, either. Finally, revenues are unlikely to surge, even under a bull-case scenario. Relentless cost-cutting won’t do the trick.
Dilution/Dividend Risk
The total number of shares outstanding has constantly risen in the last couple of years and there’s no reason to think that Barclays won’t need to issue more equity to strengthen its balance sheet. The dividend is expected to double between 2013 and 2016, but I wouldn’t bank on it — several risks weigh on the bank’s profitability, as you know by now.
Its forward price to earnings ratio drops to 6 times in 2018. That’s appealing, right?
In truth, if Barclays doesn’t meet bullish estimates for earnings and is forced to raise fresh capital, or both, its shares will never hit 360p or 280p — the top-end price target and the average price, respectively, according to estimates. Rather, it will continue to plummet, just as it has done in recent months.
(As you may know, my suggested price target by the end of 2014 is 200p.)
