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Barclays (LSE: BARC) shares have dropped 19% from their 4 February one-year high of £5.06. But the latest pullback looks increasingly out of step with the bank’s underlying momentum.
Despite a tougher macro backdrop with the ongoing conflict in the Middle East, the group continues to deliver resilient earnings. It is also strengthening its balance sheet and returning capital to shareholders at a healthy rate.
As such, I think it looks like a classic short-term risk/long-term reward play to consider, with a big gap between its current price and its true value. The difference between these two is where big profits for long-term investors can be made.
So how high can the stock go?
Undervalued against its peers?
Beginning with comparisons to its competitors, Barclays’ price-to-sales ratio of 2 is bottom of its group, which averages 3.2. These firms comprise Standard Chartered at 2.4, NatWest at 2.9, Lloyds at 3, and HSBC at 4.4. So, it looks very undervalued here.
The same is true of its 8.9 price-to-earnings ratio against the 11.4 average of its peers.
And it also looks a bargain on its 0.7 price-to-book ratio versus its competitors’ average of 1.1.
Genuinely undervalued?
I ran a discounted cash flow analysis to try to pinpoint the true value of Barclays’ shares. This identifies where any stock should be priced — its ‘fair value’ — based on the fundamentals of the underlying business.
To achieve this, the DCF modelling projects a firm’s future cash flows and discounts them back to today. Some analysts’ modelling is more conservative than mine, depending on the inputs utilised.
Nonetheless, based on my own DCF assumptions — including an 8.4% discount rate — Barclays shares are now 58% undervalued at their current £4.08 price. This implies a fair value for the shares of around £9.71 — more than double where it trades today.
Share prices often converge to their fair value over time. So the gap here suggests a potentially terrific buying opportunity to consider today if those DCF assumptions hold.
Supported by strong growth momentum
Earnings growth is the key driver for share price gains over the long run. A risk to Barclays is a sharper-than-expected slowdown in the UK economy, which could worsen its bad loan book. Another is persistently high inflation and elevated gilt yields, which could keep its funding costs high.
Nevertheless, analysts forecast Barclays’ earnings will grow an average of 8.2% a year to end-2028. This looks well supported by its 2025 results, which saw profit before tax (PBT) jump 12.3% to £9.1bn. Meanwhile, return on tangible equity (ROTE) — a key profit measure for banks — rose 0.8 percentage points to 11.3%.
Looking ahead, management upgraded its ROTE target to above 14% by 2028 (from more than 12%). It also announced a £1bn share buyback, which tend to support share price gains.
My investment view
The gap between Barclays’ short-term risk and long-term rewards looks to me like it could close over time on strong earnings momentum. Consequently, I think it well worth the attention of long-term investors looking for share price gains.
I already have holdings in two banks — HSBC and NatWest — and owning another would unbalance my portfolio’s risk/reward balance. However, other bargain-basement opportunities have caught my eye, with several also generating high dividend income as well.
