How Lloyds Banking Group Measures Up As a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth At A Reasonable Price," or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.

Today I am looking at Lloyds Banking Group  (LSE: LLOY  ) (NYSE: LYG  ) to see how it measures up.

What are Lloyds Banking Group's earnings expected to do?

  2013 2014
EPS Growth n/a 32%
P/E Ratio 13.9 10.5
PEG Ratio n/a 0.3

Source: Digital Look.

City analysts expect Lloyds to rebound in the current year from losses per share of 2 pence in 2012, with earnings per share (EPS) of 4.5 pence pencilled in for 2013. This is then expected to advance to 5.9 pence next year.

Mathematical problems do not provide 2013's projected turnaround with valid EPS growth or PEG ratings, although next year's EPS turnaround illustrates the decent growth potential on offer. Still, next year's PEG multiple comes in below the marker of 1, which represents good value.

And although Lloyds comes in comfortably above a price-to-earnings (P/E) ratio reading of 10 for this year -- a reading under this level is usually classified as exceptional value for money -- it is anticipated to fall much closer to the benchmark in 2014.

Does Lloyds Banking Group provide decent value against its rivals?

  FTSE 100 Banks
Prospective P/E Ratio 14.8 41.3
Prospective PEG Ratio 4.5 0.9

Source: Digital Look.

Unlike Lloyds, the FTSE 100 and banking sectors both produce valid PEG ratings for the current year. Still, Lloyds' superior forward P/E rating shows the decent value on offer compared with its counterparts.

After a prolonged slog and severe transformation measures, I believe that Lloyds has emerged from the 2008-2009 financial crisis and subsequent government bailout in excellent shape. And I expect a more streamlined company to punch strong revenues and earnings growth moving forwards.

Customisable conclusion
A huge reduction in impairment charges, combined with massive cost-cutting measures and asset sales, have led to a vast improvement in the part-nationalized bank's financial performance in recent times. Indeed, Lloyds announced in April that pre-tax profit had leapt to £2 billion in the first quarter versus £280 million in the same period last year.

The firm has taken huge steps to repair its balance sheet since the banking crisis, has increased its core capital requirements, and has also increased its cost-reduction targets for both this year and next.

Meanwhile the firm, whose cluster of strong retail subsidiaries service one in three British people, is reporting better performance in its key domestic markets. And Lloyds' Commercial Banking division saw core loans return to growth ahead of schedule in January-March, a result that helped push core underlying profit 19% higher to £1.9 billion.

Chancellor George Osborne's plans for the future of the near-40% taxpayer-owned business should become clearer after his Mansion House speech today. This will provide investors with a clearer view on whether to take a bet on the bank or not at the current time.

Zone in on other spectacular stocks
If Lloyds Banking Group fails to tickle your fancy, check out this newly updated special reportwhich highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.

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