The Lloyds (LSE: LLOY) share price is an intriguing case. For years, it’s been one of the FTSE 100‘s most underwhelming performers. The stock has always looked cheap. Yet it never budged. However, in recent times, it seems investors have finally realised its potential.
Shares in the high street bank are up 21.8% year to date. In the last 12 months, they’ve climbed an impressive 36.5%. With its recent surge, Lloyds is up 5.5% over the last five years. Finally, patient long-term shareholders are starting to see a return on their investment.
But after its stellar performance, I’m wondering whether there’s still room for more growth. Let’s take a look.
Cheap as chips?
One of the best ways to begin is by looking at Lloyds’ valuation. There are a couple of metrics I can use. Let’s start with the key price-to-earnings (P/E) ratio.
Even after its share price soared, Lloyds still looks like great value for money. It currently trades on a P/E of 8.3. That’s below the Footsie average of 11. What’s even better is that Lloyds’ forward P/E is just 6.3.
Alongside that, I also want to look at the stock’s price-to-book (P/B) ratio. This is a valuation metric more commonly used for banks. Lloyds’ current P/B ratio is 0.9. Considering 1 is deemed fair value, that suggests it could be slightly undervalued.
Where next?
Based on that, its recent rally may not be the end of it for Lloyds. But I’m also intrigued to see what experts think the stock could do. With that, let’s take a closer look at broker forecasts.
It’s worth noting that broker forecasts should be taken with a pinch of salt. They have the potential to be wrong. Nonetheless, I believe they can offer a good guide.
Eighteen analysts offering a 12-month target price have an average price of 62p. As I write, that represents a 7.1% premium from its current price. Of those, the highest target is 74p. That’s a 27.9% premium. Then again, the lowest is 54p, which is 6.7% lower than where the stock is at right now.
Falling rates
But on average, analysts see Lloyds keeping up its fine form. Couple that with its cheap valuation, and there seems to be a lot to like about the Footsie constituent.
Then again, I do see a couple of issues that could stunt Lloyds’ growth. The first is falling interest rates. We saw the Bank of England make its first cut back in August and on 18 September we saw the Fed cut rates by 0.5% in the US. While that will lift investor sentiment, it does mean shrinking margins for Lloyds.
That’s because lower rates mean the bank can’t charge customers as much when they borrow money. Lloyds net interest margin shrunk in the first half of the year. In upcoming months, I’d expect this trend to continue.
On top of that, Lloyds is reliant on the UK for its revenues. Should the domestic economy stumble, this could lead to its share price being pulled back.
I’d buy
But on the whole, Lloyds is a stock I’d buy today if I had the cash. With its cheap valuation, I see plenty of growing room. I’m optimistic it can keep up its momentum going forward.
