Barclays: On Track For Super-Charged Shareholder Returns

seekingalpha11-02

Barclays stock is poised for significant upside, supported by strong Q3 results, a cheap valuation, and improving commercial momentum.The bank's Q3 performance exceeded expectations with strong ...

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Today, reflecting on a solid Q3 print, I am reiterating my bullish stance on the UK bank. In fact, I feel stronger than ever that Barclays exemplifies a classic deep-value opportunity. In my view, as Barclays is on track to double-digit ROTE while distributing >50% of earnings to shareholders, the bank's 0.6 price-to-book valuation is increasingly hard to justify; and accordingly, an ongoing re-rating in the coming quarters may be expected. Based on my updated residual earnings model, I now estimate that Barclays U.S. ADR stock should be valued at about $33 per share. For context, Barclays stock has outperformed the broader equities market YTD. Since the start of the year, Barclays stock is up almost 60%, while the S&P 500 (SP500) has appreciated by \"only\" about 22%. Seeking Alpha Strong Q3 2024 Performance Underscores Ongoing Strong Momentum Barclays' Q3 results came in ahead of expectations, with results beating consensus on both revenue and earnings. During the period spanning from July through the end of September, the bank delivered £6.55 billion in total income (up 5% YoY), exceeding estimates by 1%. Profit before tax hit £2.23 billion—surpassing consensus forecasts by 13%. Strong profitability was achieved by operating leverage, as a higher topline met stable costs. Notably, the bank's cost-to-income ratio in Q3 was held at 60%, aligning with management's ongoing commitment to maintaining operational discipline and tightening up expenditures. Segment Analysis: The Growth Engines Fueling Barclays' Long-Term Upside With this, Barclays ROTE jumped to 12.3%, up from 11% for the same period one year earlier. Barclays Q3 2024 results On a segment basis, it is noteworthy to highlight that in Q3 the UK consumer bank managed to score growth in NII (up 2% YoY and 3% QoQ), supported by strategic hedging initiatives. Moreover, the positive momentum is expected to carry through to Q4, with net interest income for the full year now anticipated to exceed £11 billion. Meanwhile, the bank's CIB segment saw some softness in income, down to £3.3 billion. However, Barclays remains competitive, capturing gains in equity sales & trading market share, particularly from revaluation tailwinds in its Visa B shares and sustained client demand. In addition, fee income saw an impressive YoY jump—bolstered by double-digit growth in M&A and debt capital market (DCM) revenues. Strategic Roadmap to 2026: On Track For Shareholder Returns Building on strong Q3 results, Barclays is on track to deliver against the bank's seemingly ambitious, yet achievable, roadmap for growth, profitability, and shareholder value. As a reminder, Barclays is aiming for £30 billion in revenue by 2026—a target that is still 3% above current consensus expectations, according to data collected by Refinitiv. At the same time, management promised to keep costs in check, with a cost-to-income ratio target of below 60%. If the topline and cost targets are achieved, then Barclays would be able to deliver on tangible equity exceeding 12%. Most importantly, however, Barclays has promised to return most of the earnings generated through 2026 to shareholders: The bank plans to return $10 billion to shareholders over the next three years, which suggests a cumulative equity yield of 30% through 2026. Barclays Q3 2024 results Target Price: Raise To $33 Based on Barclays' strong Q3 results and an ongoing positive outlook for investment banking fees, I am revisiting my EPS projections for BCS through 2026. I now estimate that BCS's EPS in 2024 will likely range between $2.9 and $3. Additionally, I am raising my EPS expectations for 2025 and 2026 to about $3.3 and $3.6, respectively. These estimates are approximately 10% higher than the consensus, underscoring my confidence in management's execution of strategic goals. At the same time, I maintain a 2.5% terminal growth rate—aligning with UK nominal GDP growth, as banks are expected to grow alongside GDP long-term—while also maintaining my cost of equity assumption of 11.5%, in line with European banking sector benchmarks. With these EPS updates, I now calculate an implied share price for BCS of about $33.06 For context, the value \"Speculation\" is just the difference to fair implied value. A positive value implies a premium; or in other words, markets are speculating to price more fundamental upside compared to my estimates. Moreover, please note that my EPS estimates are adjusted for the BCS ADR.  Refinitiv; Company Financials; Cavenagh Research's EPS Estimates and Calculation Below is also the updated sensitivity table.  Refinitiv; Company Financials; Cavenagh Research's EPS Estimates and Calculation Risks Associated With BCS Barclays stock looks very cheap. However, investors should consider that the success of buying bank stocks often hinges on the stability of the broader economy. On that note, it's important for investors to consider the potential risks—like unexpected \"black swan\" events or major market disruptions—that could impact Barclays' equity value, particularly through asset impairments on the bank's balance sheet. Interestingly, Barclays' stock has yet to fully recover to its pre-2008 levels. However, in my view, with a Common Equity Tier 1 (CET1) ratio of 13.5%, Barclays is well-positioned to navigate challenging market environments (but earnings power may suffer temporarily). Investor Takeaway  After a solid Q3 print, my conviction in Barclays stock to deliver \"triple-digit upside,\" is stronger than ever. The latest earnings results highlight that Barclays is on track for double-digit ROTE and distributing over 50% of earnings back to shareholders. With this, the bank's current 0.6 price-to-book valuation seems increasingly untenable, and I anticipate an ongoing re-rating over the next few quarters. Based on my updated residual earnings model, I now estimate a fair value for Barclays' U.S. ADR at approximately $33 per share.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480484851"}