How Barclays Measures Up As a GARP Investment
Jun 17th 2013 10:51AM
Updated Jun 17th 2013 11:45AM
LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth At A Reasonable Price," or GARP, strategy.
This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.
Today I am looking at Barclays to see how it measures up.
What are Barclays' earnings expected to do?
Source: Digital Look.
Barclays is expected to see earnings-per-share growth moderate in 2013 from the 24% rise posted last year, although strong double-digit expansion is anticipated to resume in 2014.
The firm's PEG rating is expected to remain lofty during the current year before diving into bargain terrain in 2014. Still, for both this year and next, the bank boasts a price-to-earnings (P/E) ratio below 10 -- I feel any reading below this represents exceptional value for money.
Does Barclays provide decent value against its rivals?
|Prospective P/E Ratio||14.6||42.5|
|Prospective PEG Ratio||4.5||0.9|
For the current year, Barclays surpasses the FTSE 100 average in terms of both PEG and P/E ratings.
Compared to the broader banking sector, the company comfortably beats its peers when considering the average P/E readout, although the group's sub-1 PEG rating illustrates the better near-term growth potential for Barclays' rivals.
I believe that, although Barclays fails the GARP test for 2013 because of a below-par PEG rating, the firm provides decent value for those seeking lucrative growth opportunities from next year onwards.
Bubbly start to 2013 points to improving operations
Indeed, the bank announced in April that first quarter pre-tax profit came in at £1.5 billion, recovering strongly from a loss of £525 million recorded in the same period in 2012.
A much-reduced own credit charge, at £251 million versus £2.6 billion in January, February and March last year, helped to drive the firm back into the black, although Barclays encouragingly saw its performance improve across the group.
At the Barclays Capital investment-banking arm, profits rose 11% to £1.3 billion. Elsewhere, profits rose 29% to £299 million in the group's U.K. retail and business banking division, while at Barclaycard profit increased 5% to £363 million.
Economic difficulties in South Africa weighed heavily on the firm's African division during the first quarter -- profits there slumped 39% -- but the firm is engaging heavily in product roll-outs and service improvements to latch onto the region's excellent longer-term growth opportunities. The firm operates in 14 countries in total across the continent.
With the worst of the impairment charges now behind it and significant cost-cutting initiatives implemented, I believe that a better-structured Barclays is in pole position to see earnings rocket. I expect revenue improvements at home to keep rolling, while expanding activities in hot emerging markets should help to support longer-term strength.
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The article How Barclays Measures Up As a GARP Investment originally appeared on Fool.com.Royston does not own shares in Barclays. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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