While stock markets have recovered strongly from the financial crisis, the big banks still trail. The FTSE All Share grew 139% in the 10 years to October but the FTSE All Share Banks Index ended the period 6% lower.
BARC and bite
Some might see this as a sign to walk away, but others might spot a contrarian buying opportunity. I’m in the latter camp, although it’s been lonely here lately, with Barclays (LSE: BARC) down 20% in the last six months as investors fret about the impact of rising interest rates and a slowing economy on the sector.
It didn’t help that Barclays announced a 29% fall in first-half profit before tax to £1.66bn, largely down to conduct and litigation costs totalling £2bn. However, once you exclude those costs, profits before tax rose 20% to £3.7bn.
Bank on it
There could be more penalties to come, with the SFO now taking its case over dealings with Qatari investors in 2008 to the High Court. Barclays is far from perfect, but herein lies the opportunity. It is trading at a lowly price-to-book value of just 0.4 and price/earnings ratio of just 8.4 times forecast earnings, roughly half the levels seen as fair valuation.
These stats confirm my view that Barclays is under-appreciated. Investors are wary of the banks generally, as noise grows surrounding the prospect of another financial meltdown. The banks would be in the firing line if that happened although less so than last time, given all that hard work hard building their capital cushions.
Barclays looks cheap today, and the income looks good tomorrow. It is slowly restoring its dividend and currently yields 3.8% (covered 3.2 times) and this is forecast to hit 4.7% next year. My Foolish colleague Peter Stephens tips it as a real dividend grower.
Off the Money
Moneysupermarket.com (LSE: MONY) has failed to match up to comparisons lately, its share price falling 17% in the last year. It is down 2% today after its Q3 trading update reported respectable revenue growth of 7% to £96.4m over the quarter, or 6% year-on-year.
While not bad, it operates in a challenging market, with its key Insurance arm, which contributes half of revenues, rising an underwhelming 2%, amid a falling premium cycle. CEO Mark Lewis reported continuing positive momentum in its Money division, supported by attractive products and improving conversion, and said switching rates in Energy remained strong against tough comparatives.
Big trouble
Moneysupermarket is on course to meet expectations but those expectations are lower than in the glory days, when price comparison sites were a novelty. This is a competitive sector, and although it has brand visibility, others are snapping at its heels.
It is also at the mercy of Amazon, rumoured to be planning its own insurance comparison site. City analysts predict a 1% drop in earnings per share (EPS) this year and I expected Moneysupermarket’s valuation to be cheaper than 16.4 times earnings, given the challenges.
Its EPS are forecast to grow 9% growth in 2019, while operating margins of 31.8% and a 4.1% yield, with cover of 1.6, might tempt you to buy. Always compare the market first, though, as there are better buys out there.
