I told you I was right over the shortterm, Barclays was always meant to surge to 270p, 280 a share in the first half of the year, a senior cash equity trader in the City told me in recent days, soon after I raised my personal price target for Barclays (LSE: BARC) (NYSE: BCS.US) to 220p a share from 200p.
Whats Next
Whats next for the British bank, however, is a completely different matter. Incidentally,its shares currently change hands at 262p.
As I recently argued, one problem is calledreturn on tangible equity.
Another issue could be represented by asset impairments, which could hurt earnings and impact the banks dividend policy,but I wont bother you with that today.
Rather, Ill look at whether and why analysts believe that Barclays will rise or fall over the next few months.
Estimates
The average price target from brokers stands at 293p, some 30p above Barclays current valuation, according to Thomson Reuters estimates.
The gap between the share price and consensus estimates has narrowed significantly sincethe summer of 2014, when it hit 70p in the wake of dark pool allegations in the US.While similarly bad news has not resurfaced since, the underlying performance of Barclays hasnt been particularly good, either but 17p has been added back to the average price target from brokers during the period.
Analysts are cautions on this front, yet many of them expect the banks dividend yield to range between 3% and 4.9% between 2015 and 2017. It doesnt make much sense to me.
To achieve that, Barclays may have to grow earnings at a compound annual growth rate of 25% during the period, which implies that the bank will announce another big cost-cutting plan (which is very likely), or will find a way to lever up again (which is out of question in the current regulatory environment), in my opinion.
Its lowly cost to income ratio at 61% in 1Q15, the ratio stood at the low end of the range (60-79%) for the last eight quarters signals that if Barclays decided to undertake another round of aggressive cost cutting, it maylose competitiveness. Another way to keep up with market estimates is to continue to invest in its investment banking unit, which, absorbs more capital and can be extremely volatile in terms of earnings generation, though.
Way Out
One possible way to boost confidence would be to announce a comprehensive reshuffle of its management team, just as Deutsche Bankrecently announced it would do.
Antony Jenkins, the chief executive of Barclays, surely enjoyed the first few months in the job, with the stock up to about 300p a share from 169p when he was appointed, but the stock performance of Barclays has been poor over the last 18 months, having lost 11% of value since early 2014.
Of course, several key shareholders noticed that DBs announcement boosted its stock, and Barclays could be next, particularly if interim results next month dont live up to expectations, my source concluded.
The benefits of investing in Barclays do not outweigh the risks at present time, in my view, and that’s why I recommend you look for value elsewhere.
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Alessandro Pasetti owns Deutsche Bank shares. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
