Typically, when a stock rallies hard over the space of a year or more, it has the potential to become overvalued. So when some investors see the 67% jump in the Barclays (LSE:BARC) share price over the last year, some might discount it as a viable investment. However, this isn’t always the case!
Reasons for the rally
Barclays did well in 2024, and has been outperforming ever since the Bank of England base rate started to rise to deal with the post-pandemic-induced inflation bump. To begin with, rising interest rates helped to increase the net interest margin for the bank. This refers to the difference between the rate it lends out at versus the rate it pays on deposits.
Last year, interest rates stayed higher than many expected. The UK economy was resilient and towards the end of the year inflation started to move higher again. This meant that the share price increased as investors had to factor in the net interest margin staying higher than previously thought.
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The business has been working hard to reduce costs. Evidence of this is the £1bn+ cost-saving plan involving some job cuts and an efficiency drive. This has been received positively by shareholders. Even if revenue stays the same but costs decreaase, it should boost profits. Given that the share price is impacted by profitability, a higher figure on the bottom line of the accounts helps to increase the stock price.
All of this has pushed the stock to the highest level in a decade.
Can it still be considered cheap?
When looking at some valuation metrics, Barclays shares might not be expensive. For example, consider the price-to-earnings (P/E) ratio relative to some other global peers.
The Barclays P/E ratio is 8.52. Before we even do a comparison, this is below the fair value benchmark figure of 10 I use, suggesting it’s still undervalued. Goldman Sachs has a ratio of 14.17, Bank of America at 13.25 and Citigroup at 12.86. Barclays is still valued much lower than these similar global banks.
Next, let’s take the price-to-book ratio. For Barclays, the ratio’s 0.63. A normal figure would be 1. This would mean the market value of the stock is the same as the book value. For a bank, I’d expect this to be at 1, given the book value is largely made up of conventional assets and liabilities (eg cash, loans, etc) that can be valued easily. The low ratio currently means I feel the share price could rally in order for the ratio to move closer to 1.
A holitisic vision
Of course, valuation metrics need to be used along with other information when making a financial decision. It’s true that the bank has risks, such as the recent reputational damage caused by multi-day outages and payment issues. If this keeps happening, it could seriously undermine trust in the company.
Yet overall, I think the stock is verging on being a bargain and is one for investors to consider.
