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Lloyds’ (LSE: LLOY) share price has risen 47% from its 16 April one-year traded low of 49p.
This may be off-putting to some investors who think it cannot possibly rise much more any time soon. Others may see it as a sign of unstoppable bullish momentum and look to jump on the buying bandwagon.
My view as a former investment bank trader and longtime private investor is neither approach is helpful in choosing stocks. The primary concern for me regarding a share’s price is whether there is any value in it.
Is there value left in the stock’s price?
Lloyds looks overvalued on its 10.8 price-to-earnings ratio against its competitor’s 8.9 average.
This group comprises Barclays at 8, NatWest at 8.7, HSBC at 8.8, and Standard Chartered at 9.9.
The same is true of its 0.9 price-to-book ratio compared to its peers’ average of 0.8. However, on the price-to-sales ratio it looks fairly valued at 2.4 – the same as the average of its competitor group.
However, another picture emerges from my assessment of where its share price should be, based on future cash flows. Consensus analysts’ estimates are that Lloyds’ earnings will increase 13% each year to the end of 2027.
Factoring this into other analysts’ figures and my own, the discounted cash flow shows Lloyds is 47% undervalued right now.
Therefore, the fair value of the stock is £1.36, although it may go lower or higher than that.
How does the core business look?
I thought Lloyds’ 2024 results released on 20 February were broadly poor, although there was some positive news.
On the negative side, underlying net interest income (NII) fell 7% year on year to £12.845bn. This is money made from the interest difference on loans given out to deposits taken in.
Continued NII declines remain a key risk to Lloyds going forward, given the still-bearish interest rate trend in the UK.
One positive factor in the annual results was that underlying non-NII income rose 9% to £5.597bn. This reflects Lloyds’ efforts to increasingly substitute interest-based with fee-based business.
Overall, though, underlying profit fell 19% to £6.343bn – well below analysts’ estimates of £6.7bn.
Will I buy the stock?
I am focused on shares that pay a 7%+ dividend so I can live off these and reduce my working commitments. Lloyds currently yields just 4.4%, which is too low for me on a high-yield investment basis.
On a growth-stock basis, it looks too risky for me. Its efforts to shift focus from interest-based to fee-based business look less convincing than other banks I already own — HSBC and NatWest. They also look to me to be at least as undervalued as Lloyds.
Another major Lloyds risk is the potential cost of claims arising from its motor finance commission arrangements in the UK. The 2024 results reflected another provision for this – of £700m, to add to the previous £500m set aside.
Nonetheless, I think there is no telling right now whether this will be enough, given the scope of variables involved.
And on top of this is the volatility risk arising from its sub-£1 price. Every penny here constitutes 1.4% of the stock’s entire value!
In sum, I can think of no good reason for me to buy the stock.
