The Barclays (LSE: BARC) share price seems to be one of the most hated stocks on the market right now, despite its rising profitability. Management believes the bank is still on target to hit its main profitability target for 2019 — return on tangible equity of more than 9% — even though the firm had a “challenging” first half.
While many City analysts expect the lender to miss this target, Barclays is still one of the most profitable banks in Europe. It generated net earnings of £1bn in the second quarter, and analysts believe the group will earn as much as £3.7bn in profit for the full year or 21.8p per share.
If Barclays meets this target, the stock is currently trading at a forward P/E of 6.3, that’s compared to the FTSE 100 average of 12.9.
The Barclays share price isn’t just cheap on an earnings basis. The bank’s tangible book value per share sits at around 227p. So, at the time of writing, the stock is trading at a price to tangible book ratio of 0.4.
This ratio would be acceptable if the bank was losing money. But, as noted above, it’s not. On top of the bargain basement valuation, City analysts believe the Barclays share price could yield 6.2% this year, once again above the FTSE 100 average of 4.5%.
Looking at all of the above, it’s clear Barclays is one of the cheapest stocks in the FTSE 100. But is it worth buying, or is the bank a value trap?
Only getting cheaper
Shares in the financial institution have looked cheap for several years now. However, investors have continued to sell Barclays despite its impressive turnaround and low valuation.
At this point, it’s impossible to say what catalyst will stop the declines. A resolution to the Brexit saga might help, and so will higher interest rates. Or it could just be the case that investors don’t want to own banking stocks.
I feel that as long as shares in Barclays remain cheap, the stock could be an excellent value investment, although this isn’t one for the faint-hearted. There’s a good chance the stock could continue to slide from here.
Nonetheless, the fundamentals of the business are improving even though the UK economy is hamstrung with Brexit uncertainty. What’s more, management seems to be doing everything in its power to improve profitability, cut costs and drive up efficiency.
Look to the long term
So overall, rather than focusing on short term market sentiment, I think it’s sensible to focus on the long term potential of Barclays. The bank is one of the largest in the UK and is set to churn out nearly £4bn in profits this year. Sooner or later, the market will realise the opportunity on offer here, and the shares will adjust accordingly.
In the meantime, shareholders will need a sit tight and pocket that 6.2% dividend yield. With an upside of more than 100% on offer between the current stock price and tangible book value, it could be worth the wait.
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Rupert Hargreaves owns no share mentioned. 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.