Here’s why I think the Lloyds share price is undervalued but still not worth me buying

Oliver Rodzianko reckons the Lloyds share price is not appealing enough for him to make a long-term value investment in the business. Here’s why.

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As a value investor, I know that just buying at a good price doesn’t necessarily mean a good deal over the long term. That’s because I pay an opportunity cost.

If I buy in at the low Lloyds (LSE:LLOY) share price today, my money won’t be available for other higher-growth investments. And that’s exactly the risk I see with Lloyds. In my opinion, it’s good value but a lacklustre business overall.

Lloyds of the future

Even Lloyds is jumping on the artificial intelligence (AI) wave. The bank recently opened a Technology Centre in Hyderabad, India, and it’s focusing on AI, cloud, and blockchain to support UK customers during this time of cultural change.

While this is indicative of the firm keeping up with the times, I don’t think it significantly influences the wider operational hazards the firm may face.

For example, this is a company with a lot of debt on its balance sheet. I’m considering its equity-to-asset ratio of just 0.05. That’s going to make any serious investments it makes in financial technology very hard to sustain because it will have debt repayments it’s obliged to meet instead of allocating money to infrastructure.

Value opportunity

Investors are buying Lloyds shares at the moment because of its low share price, espousing ‘good value’. That argument is supported by its price-to-earnings ratio of just six.

Considering its shares are down 94% from their all-time high, I’m not surprised it’s selling at such a low price compared to its net income. After all, sometimes there’s a reason a company is selling on the cheap.

Also, with its earnings growing significantly over the last year at a rate of 34.4%, I can see why some investors would find the shares appealing. However, due to the balance sheet risk mentioned above, I’m not sure the net income growth is sustainable.

Therefore, is Lloyds a long-term value investment, or a short-term value trade?

In it for the long term

When I’m investing in businesses, I want to know I’m getting a good deal that’s going to keep on rewarding me for decades to come. After all, that’s the Foolish way.

However, with Lloyds, I can’t believe that’s the case. Since 2008, it has issued debt most years, and it’s been paying down debt every year.

Now, management is offering quite a nice 5.5% dividend yield. But with the shares losing 28.5% in price over the last five years, I can’t see a reason to invest based solely on passive income. There’s just too much risk here that I’d lose my initial investment amount. Or more likely, but still unappetising, that the price of my shares would stay relatively flat.

Other banks might be better

If I really wanted to invest in the UK banking sector, I might consider the Mortgage Advice Bureau. This business has a strong equity-to-asset ratio for its industry of 0.4.

Now, its dividend yield is a slightly lower 3.4%. However, its shares have gained 414% in price in the last 10 years. Also, it’s currently selling at what I consider a hefty discount, with its shares 45% below their high.

I do reckon the little cash on its books is quite risky, though. It’s not the perfect investment in my eyes, but I think it is better than Lloyds.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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