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Why You Should — And Shouldn’t — Buy Barclays PLC

Today I am looking at Barclays (LSE: BARC) (NYSE: BCS.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

Restructuring delivering the goods

The effect of Barclays’ Transform package has been a massive success in stripping out unnecessary costs and getting the firm back on a course of sustained bottom-line growth. Indeed, significant streamlining at the business pushed total operating expenses excluding restructuring costs 8% lower during January-September alone, to £12.4bn, and the scheme still has plenty left in the pipe.

Meanwhile, Transform is also boosting Barclays’ position in the white-hot arena of internet and mobile banking. The business is ploughing the sums saved through branch closures into developing its online baking platform and rolling out initiatives like its PingIt smartphone payment system. Barclays has long been a standard bearer of tech innovation in the banking sector, and I expect the company to continue to lead on this front.

Legal overhang continues to haunt

Still, many remain fearful over the multitude and scale of legacy issues that threaten to derail earnings. So news last week that senior lawyer Judith Shepherd will be leaving the firm in the coming months, as reported by the Financial Times, could hardly come at a worse time. Shepherd’s exit marks the second high-profile legal departure following the resignation of group general counsel Mark Harding in 2013.

The departure comes as Barclays is being dragged through the courts in the US over claims that its ‘dark pool’ trading platform gave an edge to more frequent traders. Barclays also faces the ire of regulators after failing to settle accusations of rigging forex markets back in November, and chief executive Antony Jenkins warned that the £500m it has set aside for the issue may not be enough.

With Barclays also facing a steady stream of claims relating to the mis-selling of PPI and interest rate hedging products, the firm faces the prospect of financial penalties shooting higher.

Risk reflected in share slide?

Of course, it is impossible to quantify the exact size of these penalties, and consequently the effect on Barclays’ bottom line, in the coming years. But given the ultra-cheap levels at which the bank is still dealing, it could be argued that these risks are currently baked into the share price.

According to broker consensus, Barclays is anticipated to punch earnings growth to the tune of 29% in 2015, in turn creating a P/E multiple of just 8.8 times — any figure below 10 times is widely considered too good to pass up on. And this falls even lower next year to just 7.6 times, driven by expectations of a further 18% earnings advance.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.