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Lloyds‘ (LSE: LLOY) share price is trading up around a level not seen since 20 August 2015.
Some investors might see this rise as reason enough not to buy the shares at this price. Others may regard it as evidence of more bullish momentum to come and jump on the bandwagon.
However, neither view is conducive to making big profits over time in my experience. This comprises several years as a very senior investment trader and salesman, and more as a private investor.
I know that large, long-term returns can come from identifying the difference between a stock’s price and its value. And to clarify, price is whatever the market is willing to pay for a share. Value is what that share is worth, based on the key fundamentals of the underlying business.
So, is there any value left in Lloyds shares right now?
The core business
Lloyds’ H1 2025 results released on 24 July saw statutory profit before tax rising 5% year on year to £3.5bn. This exceeded analysts’ forecasts of £3.2bn.
Net interest income was also up 5% at £6.7bn, driven by growth in mortgage lending and current account business.
For the remainder of this year, the bank reaffirmed its £13.5bn net interest income forecast. And it did the same for its 13.5% return on tangible equity target.
Analysts estimate that Lloyds earnings will rise 15% each year to end-2027. And it is ultimately this growth that powers any business’s share price and dividends higher over time.
How does the share valuation look?
On the price-to-earnings ratio, Lloyds is top of its peer group, trading at 11.6 against an average of 10.1. These banks comprise NatWest at 8.7, Barclays at 9, Standard Chartered at 11.2, and HSBC at 11.3.
So, Lloyds is very overvalued on this measure.
The same is true on the price-to-book ratio, although less pronounced, with Lloyds at 1 compared to its competitors’ average of 0.9.
However, it looks fairly valued on its price-to-sales ratio of 2.7 – the same as its peers’ average.
To get to the bottom of this, I ran a discounted cash flow (DCF) analysis. This determines where any stock’s share price should be trading, based on cash flows for the underlying business.
As such, it is a standalone valuation independent of comparables and is the most useful in my view.
The DCF for Lloyds shows its shares are 44% undervalued right now.
Therefore, their fair value is £1.41.
My investment view
I would never buy a share priced at under £1, as the price volatility would keep me awake at night. In Lloyds’ case, every 1p it moves equates to 1.3% of the stock’s entire value!
Another major risk is the as-yet undetermined amount it may have to pay for its role in mis-selling car insurance. The UK’s Supreme Court will give its ruling on motor finance commissions on 1 August.
The Financial Conduct Authority (FCA) will then confirm whether it will proceed with a compensation scheme for affected customers. It has said it will give its verdict on these potentially massive awards within six weeks of the Supreme Court’s ruling – so, 12 September.
For those with a higher risk appetite than I, Lloyds strong earnings growth renders it worth considering, in my view.
