Barclays (LSE: BARC) and H&T Group (LSE: HAT) both sit in the FTSE’s broad ‘Financials’ sector. However, in many respects they’re very different companies.
Barclays is a FTSE 100 giant, valued at over £27bn, while H&T is listed on AIM and has a market cap of £110m. The retail division of Barclays serves a largely different customer to those who use H&T’s pawnbroking and associated services. And, thanks to its corporate and investment banking and cards and payments businesses, Barclays generates almost half its income from outside the UK, while H&T operates solely in the domestic market.
Share performance of the two companies this year — particularly since the Brexit vote — has also been markedly different. Barclays is trading 12% below its pre-referendum price, and has fallen 25% since the start of the year. H&T has gained 50% year-to-date, with over 30% coming post-referendum.
The Brexit effect
In today’s interim results for the six months to 30 June, H&T reported a 42% rise in pre-tax profit “through a combination of strong operational performance and a rising gold price”. The gold price averaged £852 per troy ounce for the half year compared with £791 in the same period last year. Furthermore, the average for July was £1,017, which bodes well for a strong second half.
The performance of Barclays, of course, like all banks, is linked to the economic cycle. Downgraded economic forecasts and a Bank of England interest rate cut since the Brexit vote aren’t ideal for Barclays, although quantitative easing (of which we have a new round) has previously helped investment banks outperform those focused solely on retail and commercial banking.
Meanwhile, H&T is in many ways a counter-cyclical business. However, it does have to carefully manage the business in phases of falling gold prices, as well as enjoying (as it is at present) the turbo-boost of gold heading north.
We can see, then, why shareholders of Barclays and H&T have experienced such markedly contrasting fortunes this year. But what of current valuations and longer-term prospects?
Two to buy?
Today’s results show H&T’s strong balance sheet. Current assets of £98m dwarf not only current liabilities of £7m, but also total liabilities of £29m. Tangible net asset value (TNAV) of £79m gives a price-to-TNAV of 1.4 at a current share price of 296p, which looks a reasonable valuation to me for a strong and expanding business.
Banks’ balance sheets, of course, are notoriously opaque, and Barclays’ own valuation is further clouded by the rundown of its non-core assets. However, a price-to-TNAV of just 0.6 at a share price of 163p strikes me as providing a substantial margin of safety.
As to earnings, Barclays trades on a current-year forecast price-to-earnings (P/E) ratio of 13.7. That may not scream ‘value’, but analysts expect earnings to advance strongly next year (despite Brexit headwinds) as non-core runs down, bringing the P/E down to just 9.1.
H&T has a current-year forecast P/E of 16, falling to 15.7 next year. I see this as a reasonable rating on the basis of the strength of the business and the potential for the price of gold to remain elevated for some time, leading to earnings upgrades.
In summary, although very different businesses, whose shares have also performed very differently this year, Barclays’ long-term recovery prospects and low valuation and H&T’s thriving business and reasonable valuation lead me to rate both stocks as buys at current levels.
