It’s been a bumpy start for the Lloyds (LSE:LLOY) share price. The stock has taken a 10% hit since the beginning of 2022. Yet despite what the share price would indicate, the business has been performing rather impressively recently. At least, that’s the impression I got after it reported its highest profit figure in over five years of £5.78bn.
Today, shares currently trade below the arbitrary 50p mark. But that’s also lower than pre-pandemic levels, despite superior financial results. So the question is, are these shares undervalued right now? Or is this a trap? Let’s take a closer look.
The bull case for the Lloyds share price
With lockdowns lifted and businesses returning to relative normality, Lloyds’ lending activities are doing the same. Covid-19 loan impairments appear to be a thing of the past. And with the Bank of England raising interest rates to combat the stimulus-cheque-triggered inflation, lending profit margins are set to expand.
Meanwhile, the group’s long-term strategy to become Britain’s largest private landlord seems to be progressing on track. As such, revenues are expected to increase by a further £700m by 2024, continuing to climb to £1.5bn by 2026. And with operating costs forecast to remain flat, margins are set to grow even further.
Needless to say, this all sounds promising. And a quick glance at the Lloyds share price certainly suggests the stock is trading at quite a discount today. After all, the price-to-earnings ratio is only a measly six. But there may be a very good reason why investors are being cautious about this bank’s valuation.
The risks may outweigh the rewards
Rising interest rates are a good thing for Lloyds, but not so much for consumers. And when paired with skyrocketing household energy bills, along with the conflict in Ukraine, there are mounting fears that a UK recession could be about to unfold. What’s more, these fears may not be unfounded.
The GfK Consumer Confidence index almost fell to its lowest point since the height of the pandemic last month. With consumer spending estimated to become far more conservative, British businesses could suffer growth loss, resulting in fewer lending opportunities for the bank.
Consequently, the revenue stream may be on the verge of taking a significant hit. So seeing the Lloyds share price trade at a low multiple isn’t too surprising.
To buy, or not to buy?
All things considered, I believe these issues are ultimately short term. While the odds of a recession may be elevated, it seems to be triggered primarily by supply shortages. And these are already starting to resolve themselves. As inflation starts to cool, I expect consumer confidence and, in turn, spending to steadily return to normal, enabling Lloyds to fully execute its long-term strategy.
Having said that, I remain untempted to add these shares to my portfolio today. Why? Because I think there are far more interesting and lucrative investment opportunities to be found elsewhere.
