Last month, Berenburg Bank issued a ‘buy’ rating on Barclays (LSE: BARC) stock, giving it a 73% upside. Other analysts seem similarly bullish on the bank’s current share price of 156p.
| Analyst | Price target | Upside |
| Berenburg Bank | 270p | 73% |
| JPMorgan | 200p | 28% |
| UBS | 238p | 52% |
| Credit Suisse | 250p | 60% |
| Goldman Sachs | 250p | 60% |
Let me explain what I think are the reasons for this optimism, along with why I just bought in myself.
A bargain P/E ratio
First off, Barclays is extremely cheap to buy into by basically every metric you can use.
Its price-to-earnings ratio is 4.7. That looks like a complete bargain compared to its main banking competitors, Lloyds (10) and HSBC (11.7). It’s even cheaper still when compared to the FTSE 100 average of 14.
Barclays is simply making a lot more money compared to how much a share costs.
Cheap assets
A further reason Barclays looks undervalued is its price-to-book ratio, which compares a company’s assets to the cost of investment.
Barclays’ P/B ratio of 0.34 is about as low as it can get. For each 34p I invest, it’s like getting £1 in assets.
This is particularly important for banks, where assets are crucial to how they generate income.
All else being equal, I’d expect the share price to increase to pull Barclays’ P/E and P/B ratios more in line with those of its competitors.
Why is it undervalued?
The obvious question here then is, what’s the reason Barclays looks so undervalued?
Part of the reason is due to the banking crisis that resulted from Silicon Valley Bank and First Republic Bank collapsing this year.
As those banks folded, Barclays lost 29% in value. That’s a lot more than HSBC or Lloyds, and is a result of Barclays having more US investments.
But if underlying operations haven’t changed, this could be an opportunity to buy in as other investors are frightened off. “Be greedy when others are fearful,” as Warren Buffett famously said.
Barclays’ biggest problem
Perhaps a bigger problem is that Barclays has been raked over the coals by regulators time and time again.
The $450m fine it received for rigging Libor rates between 2005 and 2009 is perhaps the biggest story.
But the recent news that the bank oversold securities in the US — £12bn more than it had permission to from the Securities and Exchanges Commission — shows the bank perhaps hasn’t really changed its tune or practices since.
All these issues likely contribute to investors not wanting to get their hands dirty. Hence, a cheaper share price.
A buy?
All in all, I’d say I agree with those analysts to some degree. Barclays does look undervalued. The icing on the cake here is a well-covered 5% dividend yield.
As such, I opened a position in the bank recently and will be crossing my fingers for that 73% upside.
