The Lloyds (LSE: LLOY) share price has been taking a bit of a battering again lately. Down by just over 15% from its high of ~£55 back in January, it’s currently trading down at ~£46 at this time of writing.
That’s a significant fall. Especially against the FTSE 100 fall of less than 1% for the same time-period comparison.
What’s going on? It seems out-of-kilter with the latest range of analyst forecasts for sure. There, the current consensus forecast remains a “Buy”, with a price target of ~£55.50p. JP Morgan even has it as its current “Top Pick” for the UK banking sector.
And it certainly looks the part on paper, too. With its current price-to-earnings ratio of 6.25, it’s well below the average for the industry. Meanwhile, its dividend yield of ~4.3% is both reasonable and well covered at 3.75.
True, it did miss analysts’ expected earnings back in Feb, falling short by £300m compared to the £7.2bn target. But it was vastly up compared to the previous year (£6.9bn compared to £1.2bn). More importantly, earnings were likewise well up against the pre-pandemic level of £4.4bn in 2019.
Thus, in a financial environment that sees interest rates rising, Lloyds should be very well placed to take advantage of the increased lending margin this will offer banks.
Why is Lloyds’ share price looking so cheap?
For me, I can see a couple of reasons why the market remains unconvinced as yet of the future value of Lloyds.
First up, company strategy is a great way to get a feel for where the business is going. Especially after a change at the top, like with Charlie Nunn’s appointment as Chief Exec in August last year.
Nunn outlined his long-term plans for the bank back in February – and I think it’s fair to say it’s underwhelming. Analysts seem to agree too, citing it as a major reason Lloyds isn’t getting recognition for its expected growth following its execution.
Its plans to focus on making more money from an affluent middle class seem out-of-kilter with the current environment – and a repeat of an existing tried/failed strategy. And with widely acknowledged ancient IT systems coupled with slow plans to improve them, it’s difficult to see how Lloyds will be able to compete digitally. This is pretty essential for the future, and even more so as more yet more branches close.
Then there’s the recent potential £1.5bn LIBOR claim from former Centrepoint owner Ardeshir Naghshineh. It may seem a mostly empty threat, but it’s an unhelpful reminder of the scandal back in 2012-2014 that Lloyds will want to consider done and dusted.
Is Lloyds cheap enough to make it a good buy-and-hold investment for me?
At this price level, in theory it’s not a bad play for the next year or two with its dividend yield and defensive positioning. But as a Foolish investor, it’s not one I’d want to buy and hold for three to five years as a minimum length of time – at least not until it comes up with a better plan to make the most of its sizeable asset base and market share going forwards.
After all, the future of banking is changing fast, and I believe Lloyds has some serious catching up to do if it doesn’t want to have its own ‘Kodak’ moment…
