Although Barclays(LSE: BARC) survived the credit crunch better than many of its banking peers, its shares continue to disappoint. Despite the bank not requiring state aid and being relatively profitable in recent years, its shares are still languishing at the same level at which they traded in July 2012. And with the bank's recently announced strategy doing little to win over investors, many of them may argue that Barclays will never return to its 10-year high of 790p.
While this may be true in the short run, 790p is very achievable in the long run. Certainly, it requires improved financial performance by the bank, but it has the potential to do so in the coming years.
Clearly, the bank's decision to slash dividends has irked the market. This is evidenced by the share price fall since the announcement, although the reduced shareholder payouts could prove to be a blessing in disguise. That's because Barclays intends to use the cash that would otherwise have been paid out to its investors to strengthen its financial position and reinvest for future growth opportunities.
As a result, Barclays may now have an improved long-term earnings growth profile, while in the near term it continues to offer very strong bottom line growth potential. For example, in the current financial year Barclays is forecast to increase its earnings by 11%, with them due to rise by 29% in 2017. Both of these figures are highly impressive and have the potential to rapidly improve investor sentiment in the stock.
On the topic of investor sentiment, Barclays' current valuation indicates that there's major upward rerating potential on offer. If the bank can meet its forecasts for the next two years, it would trade on a price-to-earnings (P/E) ratio of just 6.9 at the end of 2017. With the FTSE 100 trading on a P/E ratio of around 13 at the present time, Barclays would be exceptionally cheap. In fact, if Barclays were to trade at the same P/E ratio as the FTSE 100 its shares would be priced at 308p, which is 89% higher than their current price level.
Looking ahead, Barclays clearly needs to deliver rising earnings over the coming years in order to return to 790p. Assuming it trades on a P/E ratio of 13 (that is, the same as the FTSE 100's current rating), it would need to have earnings per share of 60.8p in order to trade at 790p. This would require Barclays to meet its forecasts for the next two years and then to grow its bottom line by just over 20% per annum during the next five years, or by 10% per annum over the next decade.
If Barclays were to trade at its 10-year high of 790p, it would equate to a capital gain of 385%. While that may be out of reach over the medium term, in the long run the bank appears to have the right strategy through which to deliver brisk increases in its bottom line. Therefore, while its share price performance has been disappointing of late, Barclays has the potential to generate significant capital gains and even return to its 10-year high within the next five to 10 years.
Peter Stephens owns shares of Barclays. 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.