Has Lloyds’ 242% Five Year Surge Now Outrun Its Fundamental Value?

• Wondering if Lloyds Banking Group is still a bargain after its big run up, or if the easy money has already been made? This article breaks down the numbers so you can decide with confidence.
• The stock has quietly turned into a long term winner, up 0.4% over the last week, 9.1% over the last month, 76.2% year to date, 89.8% over 1 year, 147.0% over 3 years and an impressive 242.5% over 5 years.
• That strength has come as investors have warmed to the big UK banks again, with Lloyds often in the spotlight when markets talk about improving credit conditions and a stabilising domestic economy. At the same time, ongoing discussions around regulation, interest rate expectations and UK growth have been shaping how much risk investors are willing to take in the sector.
• Despite the rally, Lloyds only scores 2 out of 6 on our valuation checks, which suggests there is more nuance here than a simple cheap or expensive label. Next, we will unpack what different valuation methods say about the shares and finish by looking at a more complete way to think about Lloyds' true worth.

Lloyds Banking Group scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Lloyds Banking Group Excess Returns Analysis

The Excess Returns model estimates what Lloyds can earn on shareholders’ equity above its cost of capital, and then capitalises those surplus returns into an intrinsic value per share.

For Lloyds, the starting point is a Book Value of £0.77 per share and a Stable EPS of £0.10 per share, based on weighted future Return on Equity estimates from 14 analysts. The bank’s Average Return on Equity of 13.16% is higher than its estimated Cost of Equity of about 7%, leaving an Excess Return of roughly £0.04 per share each year. Stable Book Value is also projected at £0.77 per share, using forecasts from 9 analysts. This supports the assumption that Lloyds can keep reinvesting at attractive rates.

Using these inputs in the Excess Returns framework gives an intrinsic value estimate of about £1.44 per share. With the model implying a 32.4% discount to the current share price, Lloyds appears undervalued on this approach.

Result: UNDERVALUED

Our Excess Returns analysis suggests Lloyds Banking Group is undervalued by 32.4%. Track this in your watchlist or portfolio, or discover 914 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Lloyds Banking Group.

Approach 2: Lloyds Banking Group Price vs Earnings

For a profitable bank like Lloyds, the price to earnings, or PE, ratio is a straightforward way to gauge how much investors are willing to pay for each pound of current earnings. In general, companies with stronger growth prospects and lower perceived risk tend to trade on a higher PE, while slower growing or riskier businesses tend to trade on lower multiples.

Lloyds currently trades on a PE of about 16.5x, which is noticeably higher than the Banks industry average of roughly 10.6x and the peer group average of around 11.4x. At face value, that premium suggests that investors are already pricing in better than average prospects. However, Simply Wall St’s Fair Ratio for Lloyds, which blends in factors such as its earnings growth outlook, profitability, risk profile, industry and market cap, comes out at about 10.0x.

This Fair Ratio is more informative than a simple comparison with industry or peers because it is tailored to Lloyds specific fundamentals rather than broad sector snapshots. With the current 16.5x PE sitting well above the 10.0x Fair Ratio, the shares appear expensive on this measure.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1442 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Lloyds Banking Group Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are simple, story driven frameworks on Simply Wall St’s Community page. They let you combine your view of a company’s future revenue, earnings and margins with a financial forecast and a fair value. You can then compare that fair value to today’s price to decide whether to buy, hold or sell. The numbers automatically update as new news or earnings arrive. For example, one Lloyds investor might build a bullish Narrative around accelerating digital transformation, wealth growth and a fair value closer to the most optimistic analyst target of £1.03. Another might focus on UK macro risks, regulation and margin pressure and anchor their Narrative nearer the most cautious £0.53 target instead.

Do you think there's more to the story for Lloyds Banking Group? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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