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Pinning anything like a reasonable valuation on Lloyds Banking
Perhaps it's best not to try too hard. Instead, perhaps it's more sensible to ask what a reasonable valuation may be five years from now.
Start trying to look too deeply into today's valuation and the myriad factors affecting it, and you're pitting your wits against people who are (probably) more intelligent and almost certainly have more information.
It was on this five-year basis that I thought Lloyds' shares were worth twice as much back in August when they were 37.5p, since when they've been under 28p. In early trade today, they're ahead more than 8% at 30p as investors find room for optimism in this morning's third-quarter statement.
I stand by my sentiment. Today's news is a mixed and complicated bag, and I won't bore you with the details. Suffice to say that underlying third-quarter pre-profits were slightly disappointing at £644m, but impairments were down on last year and capital ratios were up.
The biggest drag on the share price this year (in addition to general eurozone fears, that is) is the PPI insurance provision. Lloyds has spent 3.2bn pounds covering PPI claims in the last nine months.
The sudden sick leave of Portuguese boss Antonio Horta-Osorio due to extreme fatigue caused by overwork did nothing to help.
Meanwhile, an anonymous article by a former Lloyds executive in today's Telegraph talks of extreme stress levels at the bank. The hurry to make big changes and cost savings is clearly causing strain.
These may well be important factors. But to me, they're trading factors. All the bad news, and then some, seems to be well in the price for long-term investors.
Consider this: Lloyds' underlying core pre-tax profit for the nine months was down 9%, at 4,375m pounds. So I reckon, at 30p a share, Lloyds is valued at just over 3.5 times underlying per-tax profit, during difficult times, while net asset value is 58.3p per share. These are fearful times indeed.
The brokers now see consensus earnings of 3.6p per share for 2012. But the forecasts vary between 2p and 10p. So what would your best guess be for the year 2016?
The Lloyds oil tanker may be turning more slowly than we hoped, but it's still turning in the right direction for me, and I feel the shares continue to be worth at least twice as much as the 30p we see today. The trouble is, you must have the courage to average down on the market's fears, and that's not always easy. There will be more bumps in the road ahead.
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David owns shares in Lloyds Banking.