The Lloyds (LSE: LLOY) share price has fallen 14% in 2022. It’s a slump that reflects the growing risk to earnings as the UK economy splutters.
As a value investor, I’m attracted by many of the FTSE 100 bargains currently on offer. Stock market volatility this year has left plenty of good shares trading below value. Rio Tinto and Bunzl are a couple of beaten-down blue-chips I’ve recently bought.
All-round value
The question is whether Lloyds shares fall into this category. And I can’t deny that on paper ‘The ‘Black Horse Bank’ looks great value for money.
At 42.5p per share, Lloyds commands a forward price-to-earnings (P/E) ratio of 6 times. I’m also drawn to the company’s enormous 5.6% dividend yield.
So should I take a chance and buy the battered banking stock for my portfolio?
That P/E ratio
A low P/E ratio can be interpreted several ways. A reading of 10 times and below can suggest that a stock is undervalued. A rock-bottom earnings multiple can also be common among mature companies with low-but-stable growth prospects. Finally, a low P/E ratio can suggest the market expects a stock will fail to meet broker forecasts.
I view Lloyds’ low multiple as a red flag concerning future earnings. As the economic outlook darkens the bank’s profits potential is also reducing. In fact, City analysts have been steadily downgrading Lloyds’ medium-term forecasts in recent months. Today, the number crunchers think earnings will drop 4% in 2022 and 5% in 2023.
I think more downgrades could be coming for the FTSE 100 bank too. Recent forecast reductions reflect the increasingly gloomy picture for the domestic economy. And economists and analysts continue to reduce their GDP estimates (Goldman Sachs, for instance, predicted a 1% contraction in 2023).
Prolonged weakness
The threat of disappointing near-term earnings isn’t something that would necessarily deter me from investing in a stock. Indeed, Lloyds is a share I’d consider buying if its earnings prospects were compelling from a long-term perspective.
This is because I buy UK shares with a view to holding them for the long haul. The trouble for Lloyds, however, is its lack of exposure to foreign markets.
The bank can spend heavily on acquisitions to address this, but this is unlikely. So things look bleak profits-wise as Britain likely enters a period of economic upheaval. The decision of ratings agency Moody’s to cut the UK’s financial outlook to ‘negative’ is a sign of the potential trouble to come.
UK banks I’d rather buy
The one thing I like about Lloyds is its commanding share of the UK mortgage market. Over the long term, I believe this will remain a lucrative area for the bank, given the bright outlook for home prices.
However, this alone doesn’t make Lloyds shares an attractive buy in my book. In fact, I’d rather invest in other banking stocks such as HSBC or Santander instead.
These companies have significant exposure to fast-growing emerging markets. What’s more, they trade on ultra-low P/E ratios of 7 times and 5 times respectively. Unlike Lloyds, I think these are genuinely good bargains to buy right now.
