Cheap turnaround
Barclays (LSE: BARC) is still a long way from returning to its ‘normal’ level of profitability, and progress seems to be moving slowly. But, management seems keen to speed up the bank’s recovery, by accelerating plans to dispose of its non-core assets and achieve a cost:income ratio in the mid-50s.
Its latest first half results showed its adjusted return on equity improve from 7.5% last year, to 9.1%. Pre-tax profits for its investment bank jumped 36% on the same period last year, as the bank benefited from greater uncertainty surrounding Greece and the Eurozone.
With expectations of steady improvement in its return on equity, shares in Barclays trade at 12.2 times its expected 2015 earnings and 9.8 times its forecasted 2016 earnings. On these ratios, the bank seems like a cheap turnaround play.
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Sustainable growth
Shares in intu Properties (LSE: INTU) trade at a 14% discount to its net asset value (NAV), as the shopping centre REIT has seen its rental rates gradually decline since the recession in 2008. But, with a strong development pipeline and with household disposable incomes set to rise faster than inflation, it would only be a matter of time before rental rates recover.
The decline in like-for-like net rental income slowed to 1.0% in the first half of 2015, from a decline of 3.2% in the same period last year. Net rental income rose 9.7% to £207.6 million in the first half, and the REIT benefited from a revaluation gain of £162.2 million. As intu delivers on steady but sustainable growth in rental income and NAV, investors should value the REIT’s shares more fairly.
Shares in intu currently yield 4.1%.
Volatile profits
With a P/E of 7.5, shares in 3i Group (LSE: III) have one of the lowest P/E ratios in the FTSE 100. But, investors need to be cautious at looking at 3i Group’s valuations, because a significant proportion of earnings is derived from the increase in the fair value of its investment portfolio. Although investment gains is a very important aspect of a private equity investment company, these profits are very volatile.
A much more important valuation metric for investment companies is the price-to-net asset value (P/NAV) metric. 3i currently trades at P/NAV is 1.38, which means its shares trade at 38% premium to the value of its assets. Although shares in 3i do deserve to trade at a premium to its NAV, because a significant proportion of its earnings (~10%) is derived from managing client funds, its current premium seems excessive. To me, the volatile nature of its earnings should mean shares in 3i Group are at most worth only around 10-15% above its NAV. Historically, over the past 10 years, it has often traded at a huge discount to its NAV.
Facing headwinds
Experian (LSE: EXPN) operates in the high-margin businesses of identity management and credit analytics. Growth in these markets have been rapidly in recent years, but the company now faces many headwinds. A weak economy in Brazil, falling marketing service revenue and the strengthening pound will mean earnings should be much slower in the coming years.
Analysts expect underlying EPS will decline by 3% this year, before bouncing back 8% in the following year. This implies its forward P/E ratios will be 20.4 on 2015/6 earnings and 18.8 on 2016/7 earnings. With slowing growth, these pricey forward earnings valuations no longer seem to be justified.
