Lloyds (LSE:LLOY) shares will undoubtedly hit 60p one day. That’s something I’m pretty confident about. However, most of us would like to know if that’s likely in the near-medium term. After all, we all love a quick win and time has an opportunity cost.
What the City says
City and Wall Street analysts provide ratings and price targets on the stocks they cover. This can be a really useful place to start when trying to work out how much a stock can be worth. Of course, these ratings can be wrong, and they’re often not updated as frequently as we might like. However, the consensus offers us a good starting point.
So, the average Lloyds share price target is 59.3p. That’s been raised since I last looked, and it’s also 17% above the current share price at the time of writing. A couple of months ago, Lloyds was trading around 40% below the average share price target. Clearly the margin is smaller now, but it’s still positive.
However, it appears that analysts don’t believe Lloyds is worth 60p a share at this time. So maybe we’d be foolish to think Lloyds might hit that milestone this year.
What the metrics say
Lloyds trades at 7.9 times forward earnings. Compared to recent years, that’s a little expensive. But there’s reason for this. The share price is up, and Lloyds is actually forecasted to earn a little less this year, due to an impairment on motor loans. The banking giant has set aside £450m to cover the potential cost.
However, this price-to-earnings ratio represents a discount of 21.6% to the wider global financial sector. British banks have traded at a discount to their American peers for some time. Part of the reason for this, some suggest, is a hangover from the financial crash of 2008. Investors don’t want to get burned again.
By comparison, JPMorgan is currently trading at 12.3 times forward earnings. Bank of America is trading at 11.6 times forward earnings. Yes, the US is a much stronger economy than the UK right now, but these two banks are actually expected to grow earnings more slowly than Lloyds.
For further context, Lloyds is trading at a 35.2% discount to JPMorgan. We often talk about the valuation gap between American and British companies, and this is something that could change in the coming years. Analysts have suggested the US market is getting a little overcrowded… the UK certainly isn’t.
A golden period
I recognise there are still plenty of challenges in the near term for cyclical stocks like banks. High interest rates and slow economic grow are a recipe for widespread defaults.
However, I’m relatively optimistic about the future. The UK is forecasted to be the strongest major economy in Europe over the next two decades, and in the medium term interest rates are set to find the Goldilocks zone.
So, what’s the Goldilocks zone? This is when interest rates settle somewhere between 2.5% and 3.5%. It means that net interest income remains elevated for banks, but customers don’t suffer under the weight of heavy repayments.
When will Lloyds hit 60p? I don’t think it’ll be this year, but if results continue to impress, it could be sooner than many anticipate.
