Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, I’m going to tell you why I believe Barclays (LSE: BARC) (NYSE: BCS.US) is currently in the bargain basement.
Asset valuation
My favoured financial metric for valuing banks is price-to-tangible net asset value (P/TNAV). In previous articles, I’ve explained why I currently rate Lloyds as a bargain buy at a P/TNAV of up to 1.11 and HSBC at a P/TNAV of up to 1.32.
On the face of it, Barclays, based on its half-year TNAV of 279p and a current share price of 225p, is an absolute steal on a P/TNAV of 0.81. Heck, even taxpayer-owned, non-dividend-paying Royal Bank of Scotland is valued more highly on a P/TNAV of 0.98.
Going forward
As we all know, banks are still recovering from the 2008/9 financial crisis. While good progress has been made, sales of assets, restructurings of businesses, and liabilities for past misdemeanours aren’t over yet.
How each bank’s present asset value will move, as these things play out and the industry gets on to a more stable footing, is a long way from being certain. For example, Barclays’ sale of its Spanish businesses last month knocked 4p a share off its TNAV, while, conversely, RBS has recently improved its TNAV with the reversal of some significant asset impairments.
Investment bank blues
Probably the biggest single issue for Barclays is its investment banking arm. When Barclays bought the assets of the collapsed Lehman Brothers during the financial crisis it looked a shrewd move. The company propelled itself into the world’s top 10 investment banks (the only UK representative), and looked well positioned to reap the rewards when the industry recovered.
However, it hasn’t quite worked out. With poorer capital backing than the big US players, Barclays’ investment bank has struggled and management is now in the process of drastically shrinking it. None of the company’s Footsie rivals have such a big chunk of investment-banking uncertainty weighing on their asset valuation.
At what price a bargain?
Barclays’ directors currently seem intent on keeping the group together, but analysts see value in breaking the company up. Spinning off the investment bank is one possibility, a partial flotation of the UK-based retail arm is another, and then there are possibilities for the group’s high-class Barclaycard business.
Analysts may have different ideas about precisely how Barclays could go about unlocking value for shareholders, but various sum-of-the-parts valuations suggest a share price in the region of 325p-350p.
It may take a more radical mindset than the current directors appear to have, so my bargain-buy level for Barclays is based mainly on how things are with a bit of allowance for how they might be.
While a discount to TNAV may be in order, I think a P/TNAV of 0.9 gives a decent margin of safety for the uncertainty around the balance-sheet value of assets, while giving some credit for the potential for unlocking the sum-of-the-parts valuation.
As things stand, that means I have Barclays in the bargain basement at a price of up to about 247p.
