Trying to estimate what sort of returns an asset like the Lloyds (LSE: LLOY) share price will return over the next 12 or 24 months is a tough challenge.
It is impossible to predict the future. Therefore, it is also impossible to predict where the stock will be trading a couple of weeks, months, or even years from this point.
However, in theory, an asset like the Lloyds share price should track the company’s underlying fundamental performance. As such, if the bank’s profits double over the next year, then its stock price could double as well.
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The company’s value could also increase significantly if the market decides to re-rate the stock to a higher multiple. At the time of writing, shares in the lender are selling at a price-to-book (P/B) value of just 0.7 and a forward price-to-earnings (P/E) multiple of 6.7.
To put these numbers into perspective, many of the bank’s international, profitable peers are selling at an average P/B ratio of 1.2 and a P/E multiple in the mid-teens.
These numbers alone suggest the Lloyds share price could rise by between 70% to 100% from current levels. On this basis, I am considering adding the stock to my portfolio.
Improving outlook
Of course, there is no guarantee the market will re-rate the stock to either one of these values. The bank has consistently traded at a discount to its international peers over the past decade. Although past performance should never be used to guide future potential.
I think the outlook for the Lloyds share price is really starting to improve. Rising interest rates could provide a significant tailwind for the lender, which may help increase overall profitability. If profits increase dramatically, this could help improve market sentiment towards the business.
Further, I think investors will return to the bank if it can begin to rebuild its reputation as an income champion. The bank paid a total dividend of 3.3p per share for its 2019 financial year.
Regulators put the brakes on bank dividends during the pandemic, but that changed towards the end of 2020.
City analysts believe Lloyds will pay out 2.5p per share for its 2022 financial year. Further growth seems likely in the following year. There is also a chance the firm could beat these projections. This could be another catalyst for the stock in the months and years ahead if it does.
Lloyds share price tailwinds
I think these tailwinds could support the stock over the next 24 months. However, I also need to consider the risks the bank faces. These include the cost of living crisis and the prospect of rising wage costs. These challenges could weigh on growth. Additional regulatory headwinds may also hit market sentiment towards the enterprise.
Still, despite these potential challenges and based on all of the above, I think the right pieces are in place for the stock to double over the next 24 months.
There is no guarantee the shares will rise 100%, but it certainly looks to me as if the right tailwinds are blowing the business forwards. On that basis, I would be happy to buy the stock for my portfolio today.
