The Lloyds (LSE:LLOY) share price is at almost unheard-of low levels in relation to its earnings.
Its price-to-earnings ratio at the moment is around 4.5. So, does that mean the investment should be a buy for me?
Not necessarily. After all, value investing, when approached like Warren Buffett, is about buying great businesses at a low price.
Therefore, here’s the real question: is Lloyds a company worth me buying and holding over the long term when its shares are ‘on sale’?
2024 operations
The bank is planning to close 123 of its branches across the UK in an effort to shift further toward online banking. This change should help to improve margins due to lower overhead costs.
To further aid this transition, the company is also cutting approximately 1,600 roles from its workforce. Additionally, it’s looking at embracing artificial intelligence (AI) and other advanced technologies to improve its service to customers.
As an example, Cavendish Online, which is part of Lloyds, has a partnership with Aveni.ai, an AI fintech company. Its intention is to become one of the first insurance distributors to use AI in its operations.
Key financials
Notably, while the firm is aiming to improve its margins as mentioned above, it’s not as if its margins are currently poor. Its net margin is 33%, much higher than the industry median of 26%.
Rather, the firm’s balance sheet is what really looks like it needs the most attention.
For example, its equity level is just 5% of assets right now, which is in the bottom 11% of banks.
Additionally, the company’s revenues have been growing at less than 1% in the last three years on average.
However, on a positive note, its dividend yield is higher than usual at the moment, at 6%. Also, it pays out 25% of its net income to shareholders.
A closer look at the value
Now, while the company’s price-to-earnings ratio is 4.5 right now, as mentioned, the ratio is around 6 based on future earnings estimates. That means analysts think the firm’s earnings will decrease in the next year, and the shares could fall slightly in 2024 as a result.
However, when I look at the company’s valuation via a discounted cash flow analysis, things seem good.
If I project the long-term earnings of Lloyds forward for the next 10 years, and they just grew at the rate of inflation, each share could be about 65% undervalued based on this calculation.
The thing is, it’s quite likely that its earnings will grow faster than the rate of inflation over a 10-year time frame, so the shares look very cheap to me at the moment.
The moment isn’t forever
However, the current value may not last. And when Lloyds perhaps comes back to a ‘normal’ price, the question then is will the shares be worth holding on to?
To be honest, I don’t think so.
As a Fool, I don’t really trade just on price. I always look for a quality business, and fundamental to me is a strong balance sheet to protect my investment in a crisis.
Lloyds doesn’t have all the elements I need.
So, even though it’s cheap, I won’t be buying the shares right now. It doesn’t seem like a long-term investment for me.
