Is Lloyds share price really worth 52p?

Bus waiting outside the London Stock Exchange on a sunny day.

At the time of writing, the Lloyd’s (LSE: LLOY) The share price is trading at nearly 52 pence per share. The stock has traded above this level for most of the past five years.

Indeed, before the onset of the pandemic in early 2020, the stock rarely traded below 50p. The stock traded at an average price of around 60p between mid-2017 and early 2020.

Much has changed since the start of 2020, both for business and for the UK economy. Given these changes, I wonder if the Lloyds share price is worth the current price or is there something missing in the market?

Lloyds share price outlook

Several factors determine a company’s share price. The most important are fundamentals and market sentiment. If a company is fundamentally sound, with growing earnings and a strong balance sheet, investors should be willing to pay more for the company.

Market sentiment can also impact a company’s valuation. Even if a business is not profitable, if investors believe it has a lot of potential, they may be willing to pay top dollar for the business.

I think the Lloyds share price is suffering from the unfavorable market sentiment. The company’s earnings have recovered quickly from pandemic lows, but its stock price has not reflected that growth.

Indeed, at the time of writing, the stock is trading at a price/earnings (P/E) multiple of 6.3. In 2019, investors were willing to pay a double-digit multiple for the company.

Moreover, with profits of £4.4 billion forecast for 2022, compared to just £3 billion for 2019, the company will earn more in the coming year than in 2019.

As such, I don’t think it’s unreasonable to say that the market should be willing to pay a higher multiple for the stock today than in 2019.

Twin Headwinds

Interest rates and economic uncertainty are the two main challenges the company will face over the next two years. And I think those challenges are impacting market sentiment towards the company. I can understand why some investors might be worried.

The cost of living crisis coupled with rising interest rates could have a significant impact on consumer spending and borrowing. These two headwinds could prove to be a major drag on the company’s profitability.

Yet even after taking these factors into account, I can’t ignore the company’s current valuation. The Lloyds share price looks cheap on a fundamental basis, and I think the market is overlooking its future potential.

As such, I don’t think the stock is really worth 52p. I think it’s worth a lot more. In this case, I would look to take advantage of the depressed market sentiment towards the company and buy the shares in my portfolio today. As earnings continue to recover, I think the market’s view of the company may start to improve.

The post Is Lloyds Share Price Really Worth 52p? first appeared on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK recommended Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.

Motley Fool United Kingdom 2022

Richard L. Militello