If this happens, I think the Lloyds share price could soar to 100p
With the Brexit process causing significant uncertainty, it’s perhaps unsurprising that the Lloyds(LSE: LLOY) share price has fallen to 52p. As recently as May 2015, it was trading at around 90p. However, following the EU referendum, it has failed to deliver a sustained rise in its valuation.
Clearly, there are short-term risks facing the bank, as well as a wide range of other companies with exposure to the UK. But if the domestic economy is able to deliver growth over the long run, as per current forecasts, the stock could prove to be a sound recovery play. Alongside a company which released positive news on Tuesday, it could be worth buying, in my opinion.
The company in question is FTSE 100 support services specialist Ashtead (LSE: AHT). Its first-half results showed a rise in rental revenue of 18% on an underlying basis, with pre-tax profit increasing by 19% to £633.4m. During the period, it invested £1,063m in capital and a further £362m in bolt-on acquisitions. This has added 80 locations to its business and contributed to a rental fleet growth of 15%.
It continues to see a structural growth opportunity as it seeks to broaden its product offering and geographic reach. It now expects full-year results ahead of previous forecasts, with earnings due to rise by 28% in the current year, followed by growth of 13% next year.
Having fallen by 34% since the start of October, Ashtead’s shares appear to offer a margin of safety. They have a price-to-earnings growth (PEG) ratio of 0.6, which suggests they may offer recovery potential.
As mentioned, the near-term prospects for the UK economy appear to be highly uncertain. There seems to be no clear path towards Brexit at the time of writing, and this may lead to investors applying ever-larger margins of safety to UK stocks such as Lloyds.
However, the performance of the UK economy may prove to be stronger than many investors are pricing in. The IMF is forecasting a GDP growth rate of 1.6% in 2019, followed by 1.7% growth in 2020, 2021 and 2022. Although this is behind a number of developed economies, those forecasts don’t suggest the UK is about to experience a hugely challenging period that includes a recession.
If the UK economy does grow as per IMF forecasts, it could mean that the Lloyds share price is cheap at the present time. It trades on a price-to-earnings (P/E) ratio of 6.8, using 2018 forecast earnings. As such, rising to 100p over the long run may be possible, since it would mean the stock having a P/E ratio of 13.2. This doesn’t appear to be excessive.
While forecasts are subject to change and the future is uncertain ahead of Brexit, for long-term investors the bank could now offer a buying opportunity following its stock price decline.
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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.