Are Barclays shares trading at a 50% discount?

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Are Barclays (LSE: BARC) shares going at half price compared to other FTSE 100 banks? While we cannot compare share prices directly (the Barclays share price of 389p is arbitrary and could be doubled or halved without any meaningful change), there are measures like the price-to-earnings (P/E) ratio or the price-to-book (P/B) ratio that let us compare the value of different stocks.

In the case of Barclays and other banks, the P/B ratio is sometimes considered the best measure because of their large amounts assets and debts. And on this metric, then the Blue Eagle bank might be looked at as being in a 50% off sale. Let me explain.

Half price?

Firstly, what is a P/B ratio? It’s a simple way to compare the share price (the P) of a stock with the book value (the B). In simple terms, the book value is a company’s assets minus its debts – kind of like what might ‘be leftover’ if the firm stopped operations today. Barclays has a share price of 389p and a book value per share of 556p, which means the P/B of Barclays is 0.7.

It’s worth pointing out a P/B of 0.7 is cheap all by itself. The only FTSE 100 stocks with a lower valuation are asset-rich firms like British Land.

In theory, a P/B should never go below one because the price is less than the value of the assets. A P/B of 0.7 suggests that an investor is paying 70p for every £1 in book value.

And what’s strange about Barclays shares is how cheap it looks compared to other banks. The other FTSE 100 banks Lloyds (with a P/B of 1.24) and Natwest (of 1.18) are all significantly cheaper. The FTSE 100’s largest bank by market cap, HSBC, has a ratio of 1.4, suggesting that Barclays might be half price in comparison.

What’s going on here? What explains this?

Free lunches

There is no such thing as a free lunch. And it must be said that the lower Barclays valuation does come with its own baggage. Specifically, its exposure to private lending, especially in the US, may have spooked investors after the collapse of one such Barclays-linked property lender last year.

In the case of the biggest difference – that 50% drop compared to HSBC – we have to take into account that banking stocks ebb and flow with the economy. Good economic growth means higher earnings, usually. That’s why a China-focused bank like HSBC commands more of a premium because of its exposure to an economy that is still growing GDP at 5% a year or so.

With all that said, the P/B ratio is a signal that Barclays could be a cheap buy here. I think it could be worth considering for an investor looking for undervalued shares.

The post Are Barclays shares trading at a 50% discount? appeared first on The Motley Fool UK.

More reading

• Are Barclays shares really 50% cheaper than HSBC right now?
• The FTSE 100’s full of value shares at the moment. Here are 3 to consider
• Down 23%, are Barclays shares back in the bargain bin?
• Down 25%, are Barclays shares too cheap to miss?
• Down 20%! I think the market’s got these 2 cheap shares all wrong

HSBC Holdings is an advertising partner of Motley Fool Money. John Fieldsend has positions in Barclays Plc and Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, British Land Plc, HSBC Holdings, and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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