LONDON -- Back in July, of this year I wrote the article "Why I've Bought Barclays"
It was, shall we say, a tad controversial. But since then I have felt the warm glow of vindication, as the company has increased in value some 50%. In many ways, it was the classic contrarian play.
Barclays was not the only bank to do well; the share prices of Lloyds and Royal Bank of Scotland are also on the up.
But, as summer has turned to autumn, and winter soon approaches, I thought I'd reassess Barclays, and my investment in it.
If I thought the company was a good investment then, is it still a good investment now?
Apparently shocking results
At the end of October, Antony Jenkins presented his first set of results as chief executive of Barclays. These results seemed very disappointing. In the third quarter, the company made a loss of 47 million pounds, as opposed to a profit of over 2 billion pounds for the same period last year.
At first sight, these results seem surprising, shocking even -- though perhaps we are beyond being shocked by banks. It appears I was wrong all along. Surely I should be questioning my investment?
Or should I? Let's dig a little deeper...
These results include a 1.1 billion-pound charge on the firm's debt, due to changes in accounting rules, as well as an additional 700 million-pound provision for the payment protection insurance scandal.
But underlying profit actually rose 29%. And underlying profit at the investment bank more than doubled. Suddenly, things are starting to look better.
Everything including the kitchen sink
Now, I am not going to get drawn into an argument about what exceptional items should or shouldn't be included in a bank's balance sheet. I am not going to pretend I am an expert in the area.
But I think what we are seeing here is that old friend of the new chief executive: the kitchen sink. Time and again, we see new CEOs throw in any possible charge they can at the beginning of their tenure. This gives the impression that things were terrible when they started, and were much improved by the time they left.
"Kitchen-sinking" can often be incredibly blatant. But the practice is so common that it is pretty much accepted as standard. And the financial community can see through it.
That is why, despite the apparent collapse in profitability, at the news of the results the share price did not crash. In fact, it barely budged at all.
Foolish bottom line
My view of Barclays has not really changed. Now that Jenkins has got much of the bad news out of the way at the start, I see a rapid return to profitability in the future.
The bank is fundamentally strong, with a robust credit card business, and a retail banking business that continues to recover. The investment bank is well balanced, with Barclays' traditional strength in equities complemented by the strength in bonds that the company acquired when it bought Lehmans. This means the investment bank does well in both bull markets and bear markets.
So, what will happen now? Well, I will not try and second-guess the markets -- short-term fluctuations are very difficult to predict. Who knows? Perhaps we'll see a pull-back in the share price.
But, looking further ahead, although it is no longer the screaming buy it was in July, Barclays is still cheap, at a forward price-to-earnings (P/E) ratio of less than 7, and it trades at well below its net asset value. Over the years, I expect the share price to rise further and the dividend to steadily increase. I continue to hold.
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