Shares of the five FTSE 100 banks all posted bigger falls in August than the 5% decline of the index. Lloyds was the most creditable performer (-7%), while Barclays (LSE: BARC) (-11%) outperformed only Royal Bank of Scotland (-15%).
In this article, I’ll discuss why Barclays’ share price slumped, and give my view on the company’s current valuation and prospects.
Good start but rapid decline
Barclays’ shares ended July at 154.1p. Half-year results on 1 August saw the shares move up 1.2% on the day to 155.9p. However, this proved to be August’s high-water mark. The share price declined thereafter and finished the month at 136.6p.
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As Barclays releases results quarterly, all eyes were on the Q2 performance in the half-year numbers. Total income for the quarter of £5.54bn was 3% ahead of the City consensus, thanks to a capital gain from the sale of a stake in bond platform Tradeweb.
Despite the topline beat, underlying operating profit of £1.58bn was only in line, because costs were 6% higher than analysts were expecting. This was a little disappointing after the bank’s improved performance on costs in Q1, but management said it expected full-year costs to be lower than previously indicated, and thus reiterated its guidance on overall performance for the year.
Elsewhere in the results, a 9p quarter-on-quarter increase in tangible net asset value (TNAV) per share to 275p was 3% ahead of consensus forecasts, the CET1 capital ratio of 13.4% beat a consensus of 13.2%, and a 20% uplift in the interim dividend was also above City expectations.
In view of the slightly positive numbers versus what the market was anticipating, and the company’s reiterated full-year guidance, the 1.2% rise in the shares on the day seemed a reasonable response. Why did the price fall by double-digits over the rest of the month?
Four aces
There were no further regulatory news releases of note from the company through August. Nor were there any major changes to analysts’ forecasts and price targets. Morgan Stanley (neutral on the stock) said on results day that “with the miss on costs, we would expect some profit-taking,” but that was about the extent of City negativity I came across.
In contrast, my Foolish colleague Kevin Godbold slated Barclays’ first half-numbers, writing “these are not the kind of figures I like to see from an enterprise that’s supposed to be in a state of recovery and moving towards growth.” Judging by the fall of the shares through the rest of August, the market appears to have come round to Kevin’s dim view of the bank’s results and prospects.
Like Kevin, I’ve been bearish for the last couple of years on many stocks in highly cyclical sectors with significant exposure to the UK economy. However, I think some of these have now reached such a depressed level that it could pay long-term investors to start building a stake.
In these situations, I’m looking for what I see as the four aces of value investing. Namely, a strong capital position, a deep discount to TNAV, a low price-to-earnings (P/E) ratio and a high dividend yield. I don’t want one, two or three aces, but all four. Barclays has them. Its CET1 capital ratio is strong, its discount to TNAV is 50%, its forward P/E is 6.5, and its prospective yield is 6.5%. I think the time is finally ripe to start buying the stock.
