With shares in Lloyds (LSE: LLOY) having fallen by 10% since the turn of the year, it’s perhaps unsurprising that the part-nationalised bank trades on a relatively low valuation. However, what’s surprising is just how low Lloyds’ price-to-earnings (P/E) ratio now is, sitting at just just 8.6. This indicates that there’s tremendous upward rerating potential on offer and that Lloyds has the scope to rise by a much larger amount than most of its index peers.
One potential catalyst to push Lloyds’ share price higher is the sale of the government’s stake in the bank. Although this was due to take place in the first half of the current year, it has been delayed as a result of the above average levels of market volatility that have been present. This has arguably caused uncertainty surrounding Lloyds to increase and with a discount to market price, as well as bonus shares potentially being offered as part of the government’s share sale, demand for Lloyds’ stock may have suffered as investors wait for the opportunity to access those benefits via the share sale.
With part-nationalisation being a reminder of Lloyds’ troubled past, the government’s eventual share sale could show that the bank is back on track and investor sentiment may improve as a result.
Also trading on a discount valuation is 3i (LSE: III). It has a P/E ratio of just 8.2 and as with Lloyds, its shares could benefit from an upward rerating over the medium-to-long term. Of course, 3i is expected to report a rather disappointing result for the 2016 financial year that ended on 31 March. Its bottom line is due to have fallen by 36% versus the prior year and this could be a reason for the 3% fall in 3i’s share price since the turn of the year.
Looking ahead, 3i is forecast to reverse 2016’s fall in profitability with growth of 18% in the current year. This puts its shares on a price-to-earnings-growth (PEG) ratio of only 0.4 and indicates that they offer a mix of growth and value for new investors. Plus, with 3i having a yield of 3.7% it remains a strong income play too.
Value for money
Meanwhile, fellow financial services company Rathbone (LSE: RAT) also appears to offer good value for money. Unlike Lloyds and 3i, Rathbone has a rather rich P/E ratio of 17.2, but this doesn’t mean that it’s a stock to avoid. That’s because it’s forecast to increase its bottom line by 12% next year and this puts it on a PEG ratio of only 1.4.
With Rathbone having an excellent track record of growth, its PEG ratio seems to be highly appealing. For example, it has grown its earnings in four of the last five financial years, with net profit rising at an annualised rate of almost 13% during the period. This shows that it could prove to be a relatively reliable growth play and that it offers good value for money.
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Peter Stephens owns shares of 3i Group and Lloyds Banking Group. 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.