Monday, December 6, 2010

BARC.L and BWY.L - share price evaluation

Here's my post on TMF about my analysis of BARC.L and BWY.L:
Over on the value board some time ago, I read a suggestion that cyclicals might be considered cheap if they sell at a discount to their 10-year earning average. I don't recall what multiplier was suggested.

Here's an interesting buy indicator that I found over at
"My ‘ideal’ opportunity is typically a cyclical stock that’s down more than 80% from its high, which is trading on four times peak earnings and where there’s some director buying. My best stock picks have typically come from this category."

I thought I'd apply it to two sectors: banks and builders. I'll just take one example from each, and see how they fare. I'm not going to worry about directors dealings ...

Let's take the bank BARC (Barclays). It's peak adjusted earnings according to SH (Sharelock Holmes) was 66.25p, which occurred in 2007. That gives a buy price of 265p. Their high was 790p in early 2007, giving it a buy price of c 160p on that basis. It's low was in early 2009, when its price was 51.2p. Boy was that a bargain ... in hindsight, of course. BARC is currently on 263p - below the peak earnings suggested price, but way above the 80% from peak share price. Another metric that's interesting, I think, is PBV. Currently, BARC is on a PBV of 0.65. The median PBV of BARC over the last 10 years was 1.9. On a PBV basis, BARC could rise nearly 3-fold (=1.9/0.65) if it returned to its median. So, I guess it depends if you think 263p is good enough, or you want to hold out for 160p.

Now let's look at housebuilder BWY (Bellway). It's peak EPS over the last decade was 144.5, which was in 2007. On a PER of 4, this would give a buy price of 578p. BWY currently trades as 558p. Its peak share price was 1279p (I'm getting that by looking at Google finance) in May 2006 (looks like investors were predicting a downturn, even then). Lopping off 80% of that gives a share price target of 255p. As it turns out, the shares never dipped that low. It's lowest point was 420.25, which occurred in the latter half of 2006. The 80% test is clearly quite a difficult criteria to meet. BWY's PBV is currently 0.65. It's median PBV over the last 10 years is 1.2 - suggesting it may have the potential to double in price.

Interesting stuff, n'est pas?

I have some notes on BARC.L in my black book on pages 6, 16, 35.

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