Stock market

Are Lloyds shares worth the price?

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Lloyd’s (LSE:LLOY) shares are among the best performing stocks. FTSE 100 this year. But it’s not straightforward with sentiments of a decisive shift following the company’s 2023 results.

I remain happy at Lloyds but, for the first time in a while, appreciate that there are clear examples of undervalued stocks. FTSE 350 and across the US and European indices.

What is fair value?

Fair value is the price we think the stock should be worth. For example, the average share price target for the UK banking company is currently 58.3p, and represents an 11.3% premium to the current share price.

Share price targets can be a good way to understand what a fair price might be without necessarily doing the research yourself. But we also have to keep in mind that analysts don’t always keep their share price targets up to date.

For example, it may be able to discount share price targets that were issued more than three months ago. This is certainly the case in fast-moving industries like technology and artificial intelligence (AI) where companies can really surprise analysts.

Interestingly, the average price target for Lloyds shares has fallen in recent months and this probably represents the impact of car loan mismanagement fines. Some analysts have suggested the fine could be as much as £2bn. But Lloyds has calmed a few nerves by setting aside £450m.

Coming to my own conclusion.

Citi and Wall Street analysts can be wrong, but I still like to use share price targets as a broad guide. Nevertheless, it is important that I follow this up with my own research. And I want to do that by looking at the data available to me.

Lloyds currently trades at 8.2 times forward earnings. This is higher than in recent years, but likely reflects the fact that Lloyds will absorb the cost of the aforementioned fines in 2024, thereby negatively impacting earnings.

However, looking further ahead, Lloyds is trading at 7.1 times expected earnings for 2025 and 6.5 times for 2026. This data often means little in isolation, but comparisons with UK and European peers show it is trading at a modest discount.

However, comparing this data with its US peers, we can see that Lloyds is trading at a steep discount. JP MorganFor example, it is trading at 12.4 times forward earnings, and 12.3 times earnings for 2025. And that largely reflects the premium paid to US banks.

We may come to different conclusions, but my personal opinion is that British banks, particularly Lloyds, do not deserve the concession to their American peers. Yes, the British economy is growing slowly today, but it is expected to be the fastest growing major economy in Europe in the next 15 years. This is important for cyclical stocks like banks.

Similarly, while economic risks remain today, we appear to be entering a golden age for banks with interest rates set in the ‘Goldilocks zone’ and hedging to boost earnings over the medium term. Methods are set.

I don’t have an exact figure in mind, but I believe the fair value is well above the share price targets.

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