Over the past year, the Barclays (LSE:BARC) share price is up an impressive 46%. This has far outstripped the broader performance of the FTSE 100. Yet with the stock at the highest level in over five years, some are concerned that the rally could run out of steam. Here’s why I disagree.
Ongoing efficiencies
Part of what helped to spark the rally in Barclays shares earlier this year was the announcement that the bank would be focusing on cutting costs and making the group a more efficient operation.
This doesn’t just happen overnight and the benefits take time to be felt. For example, earlier this month it announced that it was selling the German consumer finance business it operated to an Austrian bank.
Not only does this provide some tidy cash for Barclays, but it again serves to simplify the operations. After all, this division wasn’t a key focus, or the most profitable part of the bank.
I think events like this will continue to happen over the coming year, which should provide further boosts to the share price as they come through and are confirmed.
Valuation catch up
Despite the strong rally, I still don’t believe the stock’s overvalued. In fact, I don’t even think it’s fairly valued at 232p. With a price-to-earnings (P/E) ratio of 8.21, it’s still below my benchmark figure of 10 that I use for a fair value stock.
Put another way, the P/E ratio has risen over the past few months as the share price has increased. Yet even with this, it’s still not that high when I factor in the earnings per share. As a result, there’s still some way to go for the share price to catch up.
Of course, this is based on the latest earnings per share. If this falls with the next results, then all of a sudden it might not look good value. This is a potential risk.
The rising tide
Finally, the stock could feel the broader benefit of a recovering UK economy this year. The latest GDP figures for May showed that the economy grew by 0.4%, higher than the 0.2% forecasted. As for inflation, it’s now back at 2%. So there are several signs the economy’s doing well.
As Barclays has a large retail and corporate arm here in the UK, it’ll feel the benefit from this. For example, consumers are probably happier to spend on their credit card more oft. Businesses might look to take out more loans to fuel growth.
Even though this will aid the whole banking sector, Barclays is well placed to take advantage of this development. As a risk, if interest rates fall due to low inflation, this would negatively impact the interest income that Barclays makes.
Time will tell whether I’m right in my prediction. I could be wrong in my view, but based on the above factors I think things still look bright for the bank. I hold the stock and won’t be selling any time soon.
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Jon Smith owns shares in Barclays Plc. The Motley Fool UK has recommended Barclays Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
