The last year has been a relatively disappointing period for investors in Barclays (LSE: BARC). The company’s share price has fallen by 3%, underperforming the FTSE 100 by over 5% in the process.
However, with it now seeming to offer an improving growth outlook and having what could be a wide margin of safety, is it worth buying for the long run alongside a smaller financial services sector peer?
Barclays has experienced a period of significant change in recent years. Under its current CEO it has changed its strategy, seeking to focus to a greater extent on its core operations. This has meant an exit from non-core operations such as Barclays Africa. Not only has this created a simpler and more focused business model, it may also have improved its risk/reward ratio. This could mean that the bank is better able to generate rising profitability in future years.
In fact, the company is forecast to deliver a rise in earnings of 15% in the next financial year. This puts it on a forward price-to-earnings (P/E) ratio of around 10, which suggests that it may be undervalued. Investors seem to have been relatively downbeat about the company’s prospects due in part to the changes it has been making, as well as the regulatory risk that has surrounded its management team.
Now, though, Barclays appears to have a clear growth catalyst for the medium term. And with the prospects for the wider index and banking sector continuing to improve, it could be a sound value opportunity at the present time. Certainly, investor sentiment may be slow to improve, but with a low valuation and improving growth prospects, the risk/reward ratio on offer appears to be enticing.
Of course, it’s not the only financial services company that could offer growth at a reasonable price. Reporting on Monday was AFH Financial (LSE: AFHP), which gained over 8% following a generally positive update.
AFH Financial’s performance in the first six months of the year was upbeat. Revenue increased by 63%, with underlying earnings per share rising 62%. Its focus on value for money and service to customers seems to be paying off, with funds under management increasing by 45%. Further acquisitions could be ahead, with the company reporting a strong balance sheet and regulatory dynamics in the industry which support further consolidation.
With AFH Financial expected to report a rise in earnings of 12% next year, it currently trades on a price-to-earnings growth (PEG) ratio of 1.4. This suggests that it may be undervalued at present and could deliver improving levels of capital growth.
Certainly, it’s a relatively small and potentially risky stock. The outlook for the industry remains uncertain and this could lead to a volatile share price. But with a margin of safety on offer, its future performance looks set to be positive following its encouraging first half of the year.
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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. 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.