On Tuesday, Goldman Sachs (NYSE:GS) initiated coverage on Barclays Plc (LON:BARC:LN) (NYSE: BCS), assigning the stock a Buy rating with a price target of GBP2.90.
The firm highlighted the stock's significant year-to-date rally, which has seen Barclays' shares surge over 40%, outperforming the banks index by 25 percentage points.
Despite this strong performance, Barclays is still trading at approximately 6 times its 12-month forward price-to-earnings (P/E) ratio, which Goldman Sachs notes is a considerable discount compared to both its historical averages and the broader European banks the firm covers.
Goldman Sachs sees the current valuation of Barclays as an attractive point for investors to enter, citing several reasons. First, the firm forecasts that Barclays will grow its earnings per share (EPS) at double the rate of its peers, with an average growth of 16% over the period from 2024 to 2026, compared to an 8% average for the firm's bank coverage.
Second, Goldman Sachs believes that Barclays' earnings will remain resilient even if policy rates fall. The bank's Group Net Interest Income (NII) is expected to continue to grow due to the UK's structural hedge. Additionally, its investment banking operations and US credit card business are likely to benefit from lower interest rates.
Furthermore, Goldman Sachs anticipates that Barclays could outperform consensus estimates. The firm's net profit forecasts for Barclays are 3% higher on average than the Visible Alpha Consensus Data over the same 2024-26 forecast period. This projection is based on what Goldman Sachs considers cautious rate assumptions.
The firm's positive outlook on Barclays' growth potential and earnings resilience, coupled with the perceived undervaluation, underpins the Buy rating and the GBP2.90 price target set for the bank's shares.
In other recent news, Barclays PLC has reported its Q2 and H1 2024 financial results, demonstrating progress consistent with its three-year plan. The bank's Q2 return on tangible equity (RoTE) was 9.9%, nearing its target of over 10% for the year.
Total income for the quarter hit GBP 6.3 billion, with expectations of net interest income reaching around GBP 11 billion for the year. Furthermore, Barclays announced a total payout of GBP 1.2 billion for H1, including dividends and a share buyback program.
Recent developments include Barclays' forecast of a structural hedge income increase of about $2 billion by 2026, and the bank's commitment to maintain cost discipline, having already achieved GBP 0.4 billion in gross efficiency savings for H1.
However, some concerns arose as Q2 saw a higher impairment compared to the previous year and a decrease in net interest margin from 11.1% in Q1 to 10.4% in Q2.
Finally, Barclays executives discussed the ongoing sale of the merchant acquiring unit, described as complex and pending further updates. They also highlighted the bank's strategic goal of keeping investment bank RWAs flat while growing RWAs in other, higher returning areas. This is part of the bank's broader strategy of disciplined execution to meet its targets.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Goldman Sachs' bullish stance on Barclays. The bank's P/E ratio of 8.76, and an even lower adjusted P/E of 7.31 for the last twelve months as of Q2 2024, aligns with Goldman's observation of Barclays trading at a discount. This is further supported by a price-to-book ratio of 0.47, suggesting the stock may indeed be undervalued.
Barclays' strong performance noted in the article is reflected in its impressive year-to-date price total return of 60.63% as of the latest data. This outperformance is even more pronounced when looking at the one-year price total return of 65.24%, reinforcing Goldman's view of Barclays as an attractive investment opportunity.
InvestingPro Tips highlight that Barclays maintains high liquidity, which could contribute to the earnings resilience Goldman Sachs expects, even in the face of potential policy rate changes. Additionally, analysts have recently revised their earnings expectations upwards for Barclays, aligning with Goldman's forecast of potential outperformance against consensus estimates.
For investors seeking a deeper dive into Barclays' financial health and prospects, InvestingPro offers 15 additional tips, providing a comprehensive analysis to inform investment decisions.
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