At the end of October, I said I believed the Lloyds (LSE: LLOY) share price looked undervalued. Since then, the stock’s jumped by nearly 20%.
But, despite this performance, I still believe shares in the banking group are deeply undervalued.
Lloyds share price value
Lloyds is one of the UK’s largest banks. That means its success is tied to that of the country’s economy. With this being the case, it’s no surprise investors have been selling the stock in 2020. The outlook for the UK economy is highly uncertain. The twin headwinds of Covid-19 and Brexit are creating a toxic operating environment for businesses.
However, I’m not bothered about the bank’s short-term prospects. Instead, I’m focused on its long-term potential. This is why I’m excited about the outlook for the Lloyds share price.
While the short-term outlook for the business is highly uncertain, I believe it has plenty of potential in the years ahead. For example, as one of the country’s largest mortgage lenders, the bank has seen an increase in profit in recent months, thanks to a mini-housing market boom. As mortgages usually last for many decades, this should lead to increased profitability for many years to come.
On top of this, a few years ago, Lloyds acquired one of the country’s largest credit card providers MBNA. As the UK economy recovers from coronavirus, this division should provide a much-needed income stream for the lender.
Reducing costs
On top of the above, management’s also been reducing costs in recent years. This has helped Lloyds push its profit margins and return equity to one of the highest levels in the UK financial services sector.
Unfortunately, the bank can’t escape low-interest rates. Nevertheless, by reducing costs and diversifying into high-interest credit cards, I think the lender has been able to offset some of these concerns.
The banking group’s latest trading updates show it’s been able to mitigate the worst effects of the coronavirus crisis on its balance sheet. I think this puts it in a strong position to surf the UK economic growth wave as the country recovers from the pandemic.
Margin of safety
All of the above should help the bank return to growth in the years ahead. But the real reason I’d buy the stock right now is its valuation.
Right now, the Lloyds share price is changing hands at a price-to-book ratio of less than one. That tells me there’s a wide margin of safety in the stock. To put it another way, it seems to me as if investors are taking an overly-pessimistic view of the firm’s outlook.
That’s why, despite the recent positive performance of the stock, I’d still buy the Lloyds share price ahead of further profits.
