The Market Is Betting Big on LYG - What's the Catch?

One of the day's most impressive performances came from Lloyds Banking, whose shares are up 11.4% - a similar performance to its UK banking counterpart Barclays. At $1.91, its shares are -30.73% below their average analyst target price of $2.75. The average analyst rating for the stock is strong buy. LYG may have outstripped the S&P 500 index by 8.9% today, but it has lagged behind the index by -15.8% over the last year, returning -35.2%.

Lloyds Banking Group plc, together with its subsidiaries, provides a range of banking and financial services in the United Kingdom. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

The average trailing Price to Earnings (P/E) ratio of US-based financial services companies is 13.34 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

To better understand the strength of Lloyds Banking's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

  • 2021 operating margins: 40.3 %
  • 2020 operating margins: 11.0 %
  • 2019 operating margins: 25.6 %
  • 2018 operating margins: 34.0 %
  • Average operating margins: 27.7 %
  • Average operating margins growth rate: 61.9 %
  • Coefficient of variability (lower numbers indicate less volatility): 45.8 %

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for financial services companies is 1.95. In contrast, the average P/B ratio of the S&P 500 is 2.95. Lloyds Banking's P/B ratio of 0.7 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock.

As of third quarter of 2022, Lloyds Banking is likely fairly valued because it has a very low P/E ratio, an exceptionally low P/B ratio, yet declining cash flows. The stock has mixed growth indicators because of its decent yet inconsistent operating margins that are growing, and no published PEG ratio. We hope this analysis will inspire you to do your own research into LYG's fundamental values -- especially their trends over time.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.