At the time of writing, the Lloyds (LSE: LLOY) share price is trading close to 52p per share. The stock has traded above this level for much of the past five years.
Indeed, before the pandemic began at the beginning of 2020, the stock rarely traded below 50p. The stock traded at an average price of approximately 60p between the middle of 2017 and the beginning of 2020.
Plenty has changed since the beginning of 2020, both for the company and the UK economy. Considering these changes, I am wondering if the Lloyds share price is worth the current price, or if the market is missing something?
Lloyds share price outlook
Several factors determine a company’s share price. The most important are fundamentals and market sentiment. If a corporation is fundamentally solid, with growing profits and a strong balance sheet, investors should be willing to pay more for the business.
Market sentiment can also impact a company’s valuation. Even if a firm is unprofitable, if investors believe it has a lot of potential, they may be willing to pay a high price for the business.
I think the Lloyds share price is suffering from adverse market sentiment. The company’s profits have recovered rapidly from the lows of the pandemic, but its stock price is failing to reflect this growth.
Indeed, at the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of 6.3. In 2019, investors were willing to pay a double-digit multiple for the business.
What’s more, with profits of £4.4bn pencilled in for 2022, compared to just £3bn for 2019, the company will earn more in the year ahead than in 2019.
As such, I do not think it is unreasonable to say that the market should be willing to pay a higher multiple for the stock today than in 2019.
Twin headwinds
Interest rates and economic uncertainty are the two significant challenges the company will have to deal with over the next couple of years. And I think these challenges are having an impact on market sentiment towards the enterprise. I can understand why some investors might be concerned.
The cost-of-living crisis coupled with rising interest rates could significantly impact consumer spending and borrowing. These twin headwinds could prove to be a significant drag on the company’s profitability.
Still, even after taking these factors into account, I cannot ignore the company’s current valuation. The Lloyds share price looks cheap on a fundamental basis, and I think the market is overlooking its future potential.
As such, I do not think the stock is really worth 52p. I think it is worth a lot more. With this being the case, I would look to take advantage of the depressed market sentiment towards the business and buy the stock for my portfolio today. As earnings continue to recover, I think the market’s opinion of the business could begin to improve.
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Rupert Hargreaves has no position in any of the shares mentioned. 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.
