At first glance, I think the Barclays (LSE: BARC) share price looks cheap. So, as a value investor, I’ve been considering adding the stock to my portfolio recently.
Is the Barclays share price cheap?
Shares in the banking group are changing hands at a price-to-book (P/B) ratio of less than 0.5. In theory, that is too cheap. Book value reflects all the assets and liabilities of a business. It essentially tells us what the company is worth if it was broken up and sold in pieces today. As such, a P/B ratio of less than one may suggest that the business can be acquired, broken up and sold for more than it is currently worth.
Unfortunately, it’s not quite as simple as that. Some companies deserve to trade at a P/B of less than one. For example, if a company is losing money, it is technically shrinking. That means a P/B of less than one may be suitable.
Barclays isn’t losing money. For the nine months to the end of September, group profit before tax was £2.4bn. On that basis, I do not think that the Barclays share price deserves to trade at a P/B of less than 1. Based on that, the current valuation implies that shares in the lender are currently cheap. All of the above suggests that this profitable business is worth at least book value or more.
Of course, this doesn’t guarantee shares in the lender will produce a high return. Just because the Barclays share price appears cheap, it doesn’t mean it is a good investment. Some stocks can trade at discount valuations for years.
The bank may also encounter other risks. In the past, the financial crisis and a series of scandals have caused large losses for investors. Indeed, at the beginning of last year, the lender warned that the coronavirus crisis might cause significant losses. Management has put aside £4.3bn so far for losses associated with the crisis.
Nevertheless, Barclays remains one of the largest lenders in the UK. So far, the pandemic’s economic fallout has not been as bad as expected thanks to emergency measures from the government. The government has said that it intends to continue supporting businesses for as long as possible. That suggests that the overall impact on Barclays may be less than expected at the beginning of the pandemic.
The group’s investment bank has also provided a cushion. Profits from selling investments and raising cash for troubled companies jumped 24% to nearly £10bn in the first nine months of 2020. Investment banking profits are cyclical, so this won’t last, but the cash influx has come at a good time for the business.
However, there is no guarantee the lender will escape unscathed. Recent figures suggest unemployment hit 5% towards the end of last year, the highest level since 2016. Rising job losses may have a knock-on effect, and the government may not be able to save every business.
Still, I think that the bank has handled the crisis well so far overall. That could bode well for the Barclays share price from now on if the situation does not deteriorate further. That’s why I think the business may make a good addition to my personal investment portfolio, considering all of the risks and potential rewards on offer.
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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.