It may be somewhat surprising to find out that Barclays (LSE: BARC) (NYSE: BCS.US) has beaten the FTSE 100 thus far in 2015. After all, news flow for the wider banking sector has hardly been positive, with allegations of wrongdoing and the Libor scandal still hanging over the sector.
However, Barclays’ shares are up 9% this year (versus 6% for the FTSE 100), which is a very strong performance when you consider that, in the previous two years, they had fallen by 12% in total. Does this mean, though, that they no longer offer such appealing value for money? Or, are shares in Barclays worth adding to your portfolio?
Net Asset Value
During the depths of the credit crunch, many investors chose to value banks such as Barclays at a discount to their net asset value. The reason for this was simple: the banking sector was enduring a highly challenging period and, with the UK economy in recession, was writing down the value of its asset base. As such, while net assets may have been 1 today, next year they could realistically have fallen in value to 0.9 or 0.8. Therefore, it was sensible for Barclays and its peers to trade at a discount to net asset value.
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Today, though, the situation is very different. Certainly, bad news is still rife in the banking sector, with allegations of wrongdoing hurting the sector’s bottom line. However, with the UK and other economies out of recession, asset writedowns are fast becoming a thing of the past, and so it makes little sense for banks such as Barclays to trade at such a large discount to net asset value.
For example, Barclays currently has a price to book (P/B) ratio of 0.69. That equates to a 31% discount to its net asset value and, while an economic downturn could lie ahead and Barclays’ asset base could be written down, the chances of it falling by 31% seem slim. As such, there is a good chance that Barclays could see its valuation rise over the medium term as the market begins to realise that its shares are priced at a very attractive level.
Looking Ahead
As well as appearing to offer good value based on its net asset value, Barclays also has a very low rating according to its profitability. For example, while the FTSE 100 currently has a price to earnings (P/E) ratio of 16, Barclays trades on a P/E ratio of just 11.4. This indicates that an upward rerating could be on the cards and that is especially the case since Barclays’ earnings growth rate is far superior to that of the wider index. For example, Barclays is expected to increase its bottom line by 35% this year and by a further 22% next year, while the FTSE 100’s growth rate is in the mid to high single digits.
Therefore, while Barclays has made a strong start to the year, there is significant scope for substantial upside. And, with a P/B ratio of 0.67 and a P/E ratio of 11.4, it appears to be the best value stock around for long term investors.
