The shares of Barclays (LSE: BARC) (NYSE: BCS.US), the London-listed banking and financial services company, have been falling.
During 2009, the shares stood at 350p, after rebounding from the trough caused by the great global financial crisis. Today, they are down to 223p. That’s a poor result for those holding on, so what’s going on?
Profits up
With profits recovering, we might think the shares should be going up. Yet, at 223p, Barclays’ shares still trade below the net tangible asset value of 287p per share the firm just reported with its interim results.
Traditionally, when banks trade below their net tangible asset value they appear to be trading at a discount to worth, which implies the time is right to buy. However, I think analysing Barclays’ worth is more complex at the moment.
That rule of thumb works well when the shares form a cyclical bottom. We have to look at the chart to see that. It’s not elegant for any self-respecting quantitative-based analyst/investor, but there you are. If we want to buy a bank at the cyclical bottom, which, I’d suggest, we do, we need to see that the shares have recently plunged down a long way.
That’s not the case now with Barclays, which seems to be hovering mid-cycle, at least as far as the share-price chart goes, and arguably, as far as the macro-economic cycle goes, too.
Barclays’ cash-crunch
High financial gearing, dodgy practices, and toxic assets have plagued Barclays since the music stopped at the word’s biggest consumer-fest during the late noughties. The firm’s financial hangover is monumental, and its temples still throb. Even now, we keep hearing news of one misdemeanour after another.
Aspirins don’t seem to help much. Last year’s £5.8 billion dilutive Rights Issue hasn’t even touched the sides. The source of the pain lies buried deep in Barclays’ system and manifests as a woefully poor record on all things related to cash:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Cash at bank (£m) |
81,483 |
97,630 |
106,894 |
86,191 |
45,687 |
|
Net cash from operations (£m) |
41,844 |
18,686 |
29,079 |
(13,823) |
(25,174) |
|
Net cash from investing (£m) |
11,888 |
(5,627) |
(1,912) |
(7,097) |
(22,645) |
|
Net increase/decrease in cash (£m) |
49,831 |
17,060 |
18,273 |
(27,873) |
(41,711) |
Before Barclays stands any chance of halting or reversing its share-price decline, the bank needs to muster up a robust turnaround in its cash fortunes. Yet the recent news is poor. Results in the bank’s investment arm are disappointing, according to the directors.
That’s worrying, we haven’t experienced a full-on financial market crash so far this millennium, but we can safely wager our last pounds that there’ll be one at some point. Banks like Barclays meld to macro-economic cycles in a very direct way. As we tick-tock towards the next big downturn, the remaining time for Barclays to get its finances in order shortens.
What next?
Is it any wonder then that Barclays experiences valuation compression as we move through the current macro-economic cycle? The forward-looking stock market peers beyond peak earnings for banks like Barclays, towards difficult times in the future, when Barclays’ earnings could shrink again.
Meanwhile, in the midst of benign financial conditions, Barclays continues to flounder. That’s not good. I’m awaiting the firm’s full-year results, due at the beginning of next year, to see if cash performance is getting better.
