Play The Percentages With Barclays PLC

The forward price-to-earnings (P/E) ratio — share price divided by the consensus of analysts’ forecasts for earnings per share (EPS) — is probably the single most popular valuation measure used by investors.

However, it can pay to look beyond the consensus to the spread between the most bullish and bearish EPS forecasts. The table below shows the effect of different spreads on a company with a consensus P/E of 14 (the long-term FTSE 100 average).

EPS spread Bull extreme P/E Consensus P/E Bear extreme P/E
Narrow 10% (+ and – 5%) 13.3 14.0 14.7
Average 40% (+ and – 20%) 11.7 14.0 17.5
Wide 100% (+ and – 50%) 9.3 14.0 28.0

In the case of the narrow spread, you probably wouldn’t be too unhappy if the bear analyst’s EPS forecast panned out, and you found you’d bought on a P/E of 14.7, rather than the consensus 14. But how about if the bear analyst was on the button in the case of the wide spread? Not so happy, I’d imagine!


Today, I’m analysing ‘Big Five’ bank Barclays (LSE: BARC) (NYSE: BCS.US), the data for which is summarised in the table below.

Share price 249p Forecast EPS +/- consensus P/E
Consensus 27.6p n/a 9.0
Bull extreme 36.6p +33% 6.8
Bear extreme 19.8p -28% 12.6

As you can see, with the most bullish EPS forecast 33% higher than the consensus, and the most bearish 28% lower, we have a spread of 61%, which is much wider than that of the average blue-chip company. Furthermore, within the banking sector, Barclays’ EPS spread is more extreme than all bar Royal Bank of Scotland (118%), where earnings visibility continues to be particularly cloudy as a result of ongoing major restructuring since the financial crisis.

barclaysBarclays has its share of legacy issues affecting earnings visibility, but also has a substantial investment banking division — investment-bank earnings are more volatile than in other areas of banking — for analysts to grapple with in modelling their EPS forecasts. Hence, while Barclays’ EPS spread is not as wide as RBS’s, it is wider than the spreads of the other Footsie banks.

But get this: despite the wide spread, even on the most bearish EPS forecast, Barclays is trading on a P/E of 12.6 — comfortably below the FTSE 100 long-term average of 14. As such, with a cheapo consensus P/E of 9.0, and a bargain-of-the-century bull P/E of 6.8, I reckon the risk-reward balance is tipped decidedly towards reward for long-term investors.

Before getting carried away, though, remember that the P/E isn't everything -- particularly when it comes to analysing banks, which are a little different to most other businesses.

Therefore, if you're looking to invest in this sector, or already own shares, I urge you to read the Motley Fool's exclusive FREE report, "The Essential Guide to Investing in Banks".

You see, our senior investment analyst cuts through the fog of banking numbers to explain in plain language six key ratios you should be looking at, why they're important, and how each of the UK's big five banks measures up.

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G A Chester does not own any shares mentioned in this article.