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Barclays’ (LSE: BARC) share price has risen 85% from its 26 February 12-month low of £1.62. I think this underlines that the 5% drop following the 13 February release of its 2024 results was driven by profit-taking.
Indeed, the strong numbers highlight to me that a lot of value may still be left in the stock.
A closer look at the latest results
Barclays’ total income in 2024 rose 6% year on year to £26.788bn, ahead of analysts’ forecasts of £26.3bn. And its pre-tax profit jumped 24% to £8.108bn, again outpacing forecasts (of £8.07bn).
A risk for Barclays was – and remains – a drop in its net interest income (NII) as UK interest rates decline. NII is the difference in money made from loans given out and deposits taken in.
However, the UK banking giant continues to shift its focus away from interest-based to fee-based business.
Income from its fee-based investment banking operations was up 7% over the year, to £11.805bn. And in Q4 it rose 28% over Q4 last year to £2.607bn.
Its similarly fee-based private bank and wealth management business saw income jump 8% in the year to £1.309bn. And Q4 saw a rise on the same period last year of 12% to £351m.
Barclays’ return on tangible equity (ROTE) target of 10%+ was achieved, with a final reading of 10.5%. Like return on equity, ROTE is calculated by dividing the company’s net income by average shareholders’ equity. However, ROTE excludes intangible elements such as goodwill.
Where does it go from here?
The bank’s guidance for 2025 includes a ROTE of around 11%. This is targeted to rise to over 12% in 2026.
Additionally positive is its plan to return £10bn+ of capital to shareholders in the next two years. This will be in the form of dividends and further buybacks (which tend to support share price gains).
Consensus analysts’ forecasts are that Barclays’ earnings will rise 8.7% every year to the end of 2027.
And it is this growth that ultimately drives a firm’s share price and dividend higher over time.
Are the shares currently undervalued?
Barclays presently trades at a price-to-earnings ratio of 8.2. This is undervalued compared to the 8.4 average of its key competitors. These are NatWest at 8, Standard Chartered at 8.5, Lloyds at 8.6, and HSBC at 8.7.
It also looks undervalued on its price-to-book ratio of 0.6 against its peers’ average of 0.9.
And the same is true of its 1.8 price-to-sales ratio compared to its competitors’ 2.4 average.
I ran a discounted cash flow analysis to put these into a share price context. This shows where a stock’s price should be, based on future cash flow forecasts for a firm.
In Barclays’ case, it shows the shares are 58% undervalued at their current £2.99. Therefore, the fair price for the stock is technically £7.12, although market forces could move them lower or higher.
Will I buy the stock?
I already have holdings in HSBC and NatWest, and another bank stock would unbalance my portfolio.
If I did not have these, I would buy Barclays’ shares today based on their earnings growth potential. This should push their share price and dividend much higher over time in my view and I feel the stock is worth considering.
