While more volatility and difficulties could be ahead in the near term, in the long run the sector appears to offer high investment potential. Therefore, now could be the perfect time to invest – especially with a changing outlook likely to be ahead for the wider economy.

Improving prospects

Barclays could be a major beneficiary of the future performance of the UK economy. Uncertainty surrounding Brexit may have caused the pound to weaken and inflation to move higher, but this provides the Bank of England with the scope to raise interest rates. This could be good news for the banking sector, since it may equate to greater profit growth opportunities.

Furthermore, Brexit talks are progressing relatively smoothly at the present time. Of course, there is still a long way to go on certain issues such as the Irish border question, but with just under a year until Brexit there seems to be political will on both sides to sign an agreement. This could alleviate investor concerns surrounding the prospects for the wider economy and may lead to more favourable valuations across the banking sector.

Forecasts

Barclays is forecast to post a rise in earnings of 18% in the next financial year. Part of the reason for its high expected growth rate is the changes it has made to its business model in recent years. It has rationalised its asset base which is set to create a leaner and more efficient business. It has also sought to improve the strength of its balance sheet, which could help it to deliver a more favourable risk/reward ratio in future.

However, investors do not yet appear to have embraced its future growth potential. The company trades on a forward price-to-earning (P/E) ratio of just 9, which suggests that it offers a wide margin of safety and could be worth buying right now.

Growth potential

Of course, Barclays isn’t the only bank which could be worth buying today. Virgin Money (LSE: VM) has a P/E ratio of around 7, which suggests that it has significant upside potential. Although its bottom line is due to rise by just 2% this year as the outlook for UK consumers continues to come under pressure, the business has been able to build an impressive level of market share. This could mean that it is able to offer strong growth in more prosperous years.

While Virgin Money has a dividend yield of just 2.4% at the present time, its dividends are covered over six times by profit. This suggests that shareholder payouts could grow at a rapid rate and may allow the stock to deliver a high total return.

With challenger banks continuing to have the opportunity to win new business as the banking sector evolves and relies increasingly on new technology, Virgin Money could prove to be a sound buy for the long term.

The post Why I believe the Barclays share price is now too cheap to ignore appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. 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.

Curtis is one of the UK’s leading SIPP providers, a specialist service where reputation and size count for everything. Customers are already flocking to the group’s offering with the number of SIPPs under administration rising 14% to 76,474 by the end of December 2017. Assets under administration grew 21% to £24.7m, and the operating margin rose 1% to 25%, leading to an increase in profit before tax of 31% to £5.9m. 

Curtis is growing through a combination of organic growth and bolt-on acquisitions. During the year the total number of organic new SIPP registrations hit 8,719, 40% higher than last year’s total of 6,236. 

Expanding business 

SIPP management is a highly regulated business due to the sensitive nature of pensions management, and if it’s going to succceed in the business, Curtis has to have a long-term outlook to convince new customers to migrate to its offering and achieve the best results for existing clients. 

And if the firm can continue on its current trajectory, then I believe it can achieve big things over the next decade or two.  

Indeed, even in the next five years, the company has a tremendous opportunity ahead of it. According to estimates, the SIPP market is expected to grow by 60% to £350bn by 2020 with 750,000 more clients expected to open accounts over the next three years. 

Figures also suggest that these new assets will fall into the hands of fewer providers as rising costs and low-interest rates, which have squeezed profit margins, force companies to leave the business. For Curtis, this is excellent news. City analysts have pencilled in earnings per share growth of 16% to 17.8p for 2018, a forecast that I believe is conservative, considering the tremendous opportunity in front of it. If the group can grab just a small share of the predicted growth in the SIPP market, then there’s no reason why earnings per share cannot grow at a double-digit rate for the next five years, a forecast that easily justifies the company’s current valuation of 17.6 times forward earnings. 

What’s behind the decline? 

As well as Curtis, I also believe Virgin Money (LSE: VM) is a misunderstood stock that deserves a place in your ISA. 

Virgin’s most attractive quality right now for investors is its valuation. The stock is trading at a forward P/E of just 6.8 and a price-to-book value of 0.6, making it one of the cheapest stocks in the UK banking sector. But why is this the case? Well, it seems City analysts are concerned with the company’s rate of expansion. They believe management has been overlooking borrower quality in favour of growth. 

However, as my Foolish colleague G A Chester noted at the end of February, this is something management refutes. In the challenger bank’s full-year results, management proclaimed the firm has an “uncompromising focus on asset quality,” which is why it was able to achieve a healthy 14% return on tangible equity for the year. As management has not yet given the market any reason to doubt its capability, I have no reason to doubt this statement, and with that in mind, I believe that the challenger bank is currently undervalued.

The post 2 secret growth stars I’d buy and hold for 20 years appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Rising challenger

Shares of Virgin Money climbed as much as 6% higher in morning trading today after the challenger bank released forecast-beating annual results.

Underlying pre-tax profit of £273m was 28% ahead of the prior year and comfortably exceeded a City consensus of £259m. Underlying earnings per share (EPS) increased 22% to 39.8p versus forecasts of 37.5p. Statutory numbers weren’t much lower than underlying, as excluded costs were relatively small and genuinely one-off. As management noted, the bank is “unburdened by legacy issues.”

Customer balances continued to grow. At the year-end, retail deposit balances stood at £31bn, mortgage balances at £34bn and credit card balances at £3bn. The group is also developing SME and digital banking propositions, which provide additional drivers for future growth.

I like Virgin’s strong balance sheet, “uncompromising focus on asset quality” and very good efficiency metrics, which enabled it to deliver a healthy 14% return on tangible equity for the year. These qualities stand the group in good stead should the UK economy face headwinds. I believe the share price of 279p — representing a 6% discount to book value and seven times earnings — is too cheap to ignore. As such, I rate Virgin a ‘buy’.

No Brexit worries

Concerns about Brexit are doubtless a significant factor in Virgin’s depressed share price. However, the UK economy is not something to bother investors in BGEO, which is the holding company of the JSC Bank of Georgia.

The group released its annual results earlier this month, and performance reflected its leading position in one of Europe’s fastest-growing emerging economies. Strong growth across all its businesses produced a year-on-year increase of 23.7% in revenue and an 11.5% rise in EPS. City forecasts have earnings growth accelerating more than 20% this year, which puts the company on a forward price-to-earnings (P/E) ratio of under nine.

Demerger

BGEO has a significant corporate event in the offing. At a general meeting in April, shareholders will be asked to approve a demerger of the group into two separately London-listed businesses: a banking business, Bank of Georgia Group plc, and an investment business, Georgia Capital plc.

The former will comprise retail banking and payment services, corporate investment banking and wealth management operations, and banking operations in Belarus. The latter will comprise stakes in a number of businesses, including FTSE-listed Georgia Healthcare Group and a number of other plays on Georgia’s fast-growing economy, ranging from utilities and energy to real estate and beverages.

If you’re attracted by the favourable economic backdrop in Georgia you’d probably want to decide whether you’re interested in holding both a banking group and an investment group or whether only one or the other of them appeals to you. If you’re happy to hold both, you may want to consider investing today. If you only want one of them, you could still consider investing today but it would be simpler to wait until after the demerger.

The post 2 banking stocks at incredibly low prices appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Thankfully, there are still a few stocks on the LSE that appear to me to be trading at prices well below what they should be. One is domestic retail bank Virgin Money (LSE: VM), which trades at just 0.81 times its tangible book value, far below the sector average of 1.17.

The main cause of investor unease towards the challenger bank is the growing worry that domestic economic growth is looking dangerously close to petering out. For a purely domestic retail bank such as Virgin Money, it’s easy to understand why this would be a problem.

Yet with the economy still defying negative prognostications I believe Virgin Money appears quite attractively priced for what is a fast growing, low-cost, highly profitable lender. In the first nine months of 2017 the bank grew its mortgage lending balances by 10% year-on-year to £32.9bn while taking its market share of gross mortgage lending to 3.5% during the period.

At the same time, it is also gaining market share in the credit card sector and attracting more customer deposits. Together with an operational structure that is much leaner than larger rivals, increased lending is leading directly to improved profit metrics. In the first half of 2017 the bank’s return on tangible equity increased from 12.2% to 13.3% and underlying pre-tax profits leapt to £128.6m.

With a stable capital position, these growing profits are sufficient to both invest back in growing the business and rewarding shareholders through a rising dividend that analysts expect to reach 5.725p for the full year. While this only represents a 2% yield at today’s share price, there’s still plenty of runway for management to continue boosting returns, especially as interest rates rise and increase lenders’ profitability.

An opportunity in others’ misery

While Virgin Money continues to power on, slowing consumer confidence in the housing market means profits are being knocked at replacement window and door manufacturer Safestyle UK (LSE: SFE). Over the past half year, the company has had to issue two profit warnings as consumer demand has begun shrinking, leading analysts to predict full-year earnings per share of 14.39p for 2017, against 20.33p for the year prior.

However, even with this lower level of earnings, Safestyle still trades at just 11.6 times earnings while kicking off a whopping 6.7% dividend yield that should be safe as its mounds of cash can cover outsize dividend payouts for some time. This looks to me an attractive price point for the business as it continues to grow and can actually use this market-wide downturn to its advantage by taking its cash-rich balance sheet and lower-cost-of-production facilities to accelerate market share consolidation in its very fragmented market.

Indeed, since the beginning of the last recession in 2007, the firm has more than doubled its market share from 4.4% to 11.2%. This process should continue as Safestyle expands into the wealthier southeast of England and pushes out weaker players thanks to its financial heft.

Investing in Safestyle now may not be for the faint of heart, but long-term investors could find this a tempting time to begin a position in a highly profitable, fast-growing market leader.

The post 2 top value stocks I’d buy in 2018 appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. 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.

I think there may be better choices for long-term growth.

Is the tide turning?

Unilever shares have slipped back by around 7% from October’s 52-week high of £45.57. But at about £42, they are still valued on a 2018 forecast P/E of 20. The expected dividend yield for 2017 is now just 3%, below the FTSE 100 average of 3.9%.

One point that’s often overlooked is that the group’s growth rate in recent years hasn’t actually been that high. Sales have increased by an average of just 2.6% each year since 2011. After-tax profit has risen by an average of 4.7% per year.

Although the firm’s shares have risen by 84% since 2012, this is partly because they’ve become more expensive. In November 2012, the stock traded on about 19 times trailing earnings. Today, that figure is about 23.

If the shares were on the same trailing P/E today as five years ago, I estimate that the share price would be about £34.30. That’s around 19% below today’s price.

I may be wrong

This year’s takeover attempt has led the firm to take a more aggressive approach to profit growth. July’s interim results showed early gains from this strategy, as the group’s underlying operating margin rose by 1.8%. Underlying earnings per share were up by 12%, excluding currency gains.

Unilever may continue to power ahead. But my view is that the challenge of relatively slow sales growth won’t be easy to meet. I might continue to hold, but I wouldn’t buy the shares at the current price.

A long-term multibagger?

Several of the UK’s challenger banks have been acquired over the last couple of years. One exception to this trend is Virgin Money Holdings (LSE: VM).

This FTSE 250 bank unveiled ambitious plans for growth this morning. The group hopes to make inroads into the SME market. It’s also targeting a big increase in personal customers, when its new digital banking platform launches in 2018/19.

Unfortunately, these potentially exciting plans were overshadowed by warnings that market share and profit margins are expected to be at the lower end of previous guidance in 2018.

Competitive pressures in the mortgage market mean that the bank’s market share is expected to be at the “lower end” of 3%-3.5%. Meanwhile, credit card balances are expected to grow by a “mid-single-digits” percentage. That’s a lot less than the 18% growth seen during the first nine months of 2017.

Cheap enough to buy?

I’m pleased that the bank seems to be focusing on asset quality ahead of growth. I think that the group’s current modest valuation could be a good starting point for long-term gains.

The shares currently trade on a forecast P/E of 7.5, and at an 8% discount to a tangible net asset value of 284p. A dividend yield of 2.2% is expected this year.

Looking ahead, the firm’s move into the SME market and its planned low-cost digital bank should boost long-term profits. I believe this could be a stock to tuck away for a few years.

The post One fast-growing dividend stock I’d buy over Unilever plc appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.

Upbeat prospects

Reporting on Tuesday was challenger bank Virgin Money (LSE: VM). The company’s profitability, earnings and underlying return on tangible equity were all in line with expectations in the third quarter of the year. It had a 3.5% market share of the gross mortgage lending market, while net mortgage lending of £3.2bn gave it a market share of 10%. The company has seen continued stable credit performance across mortgages and cards, with it reaffirming guidance for the full financial year.

Looking ahead, Virgin Money is expected to record a rise in its bottom line of 24% in the current year, followed by additional growth of 6% next year. Despite a positive outlook, it trades on a price-to-earnings (P/E) ratio of just 8.2 and this suggests that it offers a wide margin of safety at the present time.

Furthermore, the company is expected to increase dividends by 25% over the next two financial years. This may put it on a forward dividend yield of just 2.1%, however dividends are due to represent just 17% of profit in 2018. This means that dividend growth could remain at high levels over the long run. This could turn Virgin Money into a desirable income stock and mean that it has a mix of income and growth potential for the long term.

Investment potential

Also offering a bright future for investors is Aldermore (LSE: ALD). The lender has recorded a rise in its share price of 86% in the last year, with some of that growth coming in recent days as a potential offer being made for the business by FirstRand has been announced. While there is no guarantee that an offer will be made, the board of Aldermore has indicated that it would be likely to recommend a firm offer at the current level.

Of course, it appears to be cheap at its current share price. The company trades on a P/E of just 9.8 and is forecast to post a rise in its bottom line of 23% in the current year. And with dividends due to rise by 183% next year, it appears to have significant income appeal for the long run.

Certainly, the outlook for the UK economy is uncertain. Brexit talks are slow and this theme may continue, with there being a potentially negative impact on confidence among businesses and consumers. However, with such a low valuation and bright earnings, as well as dividend growth prospects, the company could be worth buying for the long term.

The post 2 cheap, high-yield growth stocks I’d buy appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

But for those who reckon the economy is on steady ground, I reckon Virgin could be a great turnaround stock as it continues to grow profitably and its shares trade at only 0.7 times their book value, suggesting plenty of room for upward share price movement if investor sentiment turns positive again.

The company’s health was on full display in H1 results. Underlying pre-tax profits rose to £128.6m from £101.8m the year before as it brought in more retail deposits and promptly turned them into profitable mortgages and new credit card advances. The loans the company has been extending appear to be quite safe, as well as mortgages in arrears of three months or more at just 0.15%, below the industry average of 0.91%. Likewise, credit card arrears were a fraction of the industry average.

On top of making solid loans, the company’s management team is making good progress in cutting costs. Its cost-to-income ratio in H1 fell from 58.8% to 53.9% year-on-year (y/y), which helped boost return on equity (RoE) to an industry-beating 13.35 even as net interest margin remained low due to rock-bottom interest rates.

Unlike larger rivals, Virgin Money is also unencumbered by legacy bad assets or regulatory fines. This means as the company ramps up profitability it can afford to actually pay dividends. The company’s interim dividend was 1.9p and analysts are expecting a full-year payout of 5.84p against 36.79p in earnings per share. With a strong tier one capital ratio of 13.8% the bank’s balance sheet will allow for an ever greater portion of rising earnings to be paid out in dividends in the years to come.

Investors who reckon recent housing price weakness and tepid consumer confidence are only temporary may find a highly-discounted Virgin Money a great contrarian option today.

Slimming down to grow

A riskier turnaround option I’ve been eying up is Molins (LSE: MLIN), which produces packing machinery and equipment for the consumer goods and healthcare industries. The company has suffered from three straight years of falling earnings but its new management team has an ambitious plan to turn things around.

The first step was selling its tobacco packaging business for £30m. This will allow it to focus on the faster growing parts of its business that recorded £25m in revenue in the half year to June. The proceeds from the sale will go towards acquisitions and organic expansion that will allow it to cement its global footprint and land larger contracts with multi-national and local customers.

With the sale only completed on August 1, it’s still very early days, but initial signs of a turnaround are promising. In H1, underlying earnings per share were 3.1p, a vast improvement on the 4.2p loss recorded in the year prior. And with net debt down to just £1.1m even before the proceeds of the sale, the company will have plenty of financial flexibility to pursue deal-making. There’s still a lot of work to be done, but I’ll be keeping a close eye on Molins in the quarters to come.

The post 2 top turnaround stocks that could make you rich appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

However, after nearly a decade of poor returns it now looks as if the bank is finally starting to become investable again, even though legacy issues continue.

Strong results 

Today it reported results for the first half of 2017, showing progress on all fronts. Group pre-tax profit increased 13% to £2.3bn thanks to lower losses at the non-core business of £647m. Core profit before tax fell 25% thanks to another provision for PPI redress. That cost the company £700m reducing core profit to just under £3bn. Core profit also benefitted from a £615m gain on the disposal of Barclays’ Visa Europe share in 2016 so this year’s numbers were always going to be lower than last year’s inflated figures. 

As well as the additional provisions for PPI, Barclays also suffered a loss after tax from discontinued operations of £2.2bn including an impairment of the group’s holding in Barclays Africa and a loss of £1.4bn on the sale of 33.7% of Barclays Africa issued share capital. The tier one equity capital ratio increased to 13.1%.

Underlying strength 

While the group has reported a headline loss of 6.6p per share today, excluding the one-off negatives such as PPI provisions and the Barclays Africa sale, earnings per share for the period were 11.8p. 

And as the recovery continues, there’s a tremendous opportunity for investors to profit. Indeed, management is still trying to reduce the cost-to-income ratio to less than 60%, from today’s 70%. If the bank can achieve earnings per share of 11.8p before nasties today, the shares could surge higher if the group lowers costs further and improves returns.

For the full year 2018, analysts have pencilled in earnings per share of 22.5p, but this could be a conservative estimate based on today’s figures. Based on these numbers, shares in the bank trade at a 2018 P/E of 9.3 which looks exceptionally cheap considering the growth potential.

This is why Barclays is one of my top picks for a FTSE 100 starter portfolio and smaller peer Virgin Money (LSE: VM) might be a great buy to hold alongside its larger peer if you’re looking for even more growth. 

Undervalued growth

Virgin may not have the same size and scale as Barclays, but the company sure has a bright growth outlook.

Unlike Barclays’ legacy issues, Virgin has no past issues to contend with so management is free to concentrate on the company’s growth. The bank is still tiny compared to the big names of UK banking so there’s an enormous market for it to grow into. And earnings should continue to expand for many years as younger consumers increasingly switch on to alternatives to the venerable names of the British high street in all aspects of their lives, from retail stores to banks.

The shares trade at a forward P/E of 8.4 and analysts expect the group to report earnings per share growth of 22% this year. Further earnings growth of 11% is expected next year, putting the shares on a 2018 P/E of 7.8. This valuation combined with the challenger bank’s explosive earnings growth might be too hard for some value and growth investors to pass up.

The post Why Barclays plc is one of my top buys for a FTSE 100 starter portfolio appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Today I’m looking at two companies trading at big discounts to their book value. Is either stock a genuine bargain?

A property turnaround?

Ei Group (LSE: EIG) is probably still better known as pub chain Enterprise Inns. The company recently changed its name, as it’s aiming to move away from operating tied pubs to become a commercial property landlord.

However, the reality is that this business is still dominated by an enormous debt hangover from before the financial crisis. The group has net debt of £2.17bn, backed by £3.58bn of property assets. That’s equivalent to a loan-to-value ratio of 60%, which is high for a commercial property firm.

Subtracting net debt from the value of the property portfolio gives a net asset value of £1.45bn. Ordinarily, Ei’s market value should be somewhere close to this figure. But at the time of writing, the firm’s market cap is just £645m. This means that at 135p, the shares trade at a 55% discount to their book value of 300p.

If this discount eventually closes, then buying these shares could be very profitable. But it’s not clear to me how likely this is. The group generated an impressive £269m of operating cash flow last year, but £155m of this was used for interest payments and £70m was spent on refurbishing pubs.

So far, debt reduction has mostly been funded by pub sales. If this situation continues, then the stock’s low valuation may be justified. I’d want to do more research before considering whether to buy.

This bank could be cheap

Challenger banks such as Virgin Money Holdings (LSE: VM) have been a profitable investment over the last few years. But Virgin Money has lost 15% of its value over the last 12 months, even as competitors soared ahead.

What’s gone wrong? Well, it may be nothing. But investors have become concerned about the credit card market, an area where Virgin has delivered rapid growth. The bank’s credit card balances have risen from £1.5bn to £2.7bn in the last 15 months, and it’s targeting £3bn by the end of 2017.

Much of this growth has been driven by offering interest-free periods of up to 41 months. Banks record profits from credit card customers during these interest-free periods, on the assumption that customers will start paying interest at a later date. So credit card growth has been making a nice contribution to Virgin’s profits, even though many customers aren’t paying any interest.

The risk is that instead of staying loyal, customers nearing the end of their interest-free period will simply transfer their balance to another provider offering interest-free lending. If this happens, credit card issuers such as Virgin could be forced into significant profit writedowns.

The bank’s shares currently trade at a 28% discount to net asset value, with a forecast P/E of 7.8 for 2017. This may seem cheap, but the prospective dividend yield is just 2.1% and the situation looks uncertain to me. I think there’s better value elsewhere.

The post These value stocks are trading at big discounts appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Challenger banks

Today though, there is much greater choice for everyone. Challenger banks have been encouraged by the government and regulator in order to provide much-needed competition within the sector. Banks such as Virgin Money (LSE: VM) have managed to generate rising sales and improving financial performance. For example, in the last financial year its earnings increased by 28% and it is forecast to deliver double-digit growth in each of the next two financial years. This compares to a forecast fall in profit for Lloyds in 2018.

Not only does Virgin Money offer strong earnings growth, it lacks the legacy issues of its sector peer. It is a relatively simple business model and is perhaps more akin to a ‘traditional’ banking operation, in terms of offering savings and mortgage products as its core products. By contrast, Lloyds and its well-established peers have diversified into other product areas, while it remains a part-nationalised bank. Although this may not have held back investor sentiment to a large amount of late, it nevertheless means greater uncertainty for the bank’s investors.

Valuation

As well as being a more straightforward bank, Virgin Money also has a lower valuation than Lloyds. It has a price-to-earnings (P/E) ratio of only 8.7, while its sector peer has a rating of 9.1. In both cases, there is clear upside potential from a higher re-rating. Since Virgin Money has a price-to-earnings growth (PEG) ratio of 0.6, it seems to offer the more obvious capital gain potential at a time when the earnings of its industry peer are forecast to fall.

However, Lloyds may have stronger catalysts to push its share price higher. The government’s stake may have been a drag on its share price, but its sale is imminent and this may boost the bank’s total returns. Furthermore, Lloyds continues to make improvements to its business model and is gradually returning to full health. This could encourage a higher valuation, as investors may see it as a new era for the bank following the post-credit crunch difficulties.

Looking ahead

For income-seeking investors, Lloyds has much more obvious appeal. It yields 5.7% versus Virgin Money’s 2.1% yield. With inflation moving higher and expected to rise to as much as 3% or 4% by 2018, a higher income return could be a key differentiator between the two companies.

Certainly, Virgin Money looks set to deliver a rising share price due to its impressive forecasts and low valuation. However, with a size and scale advantage, as well as the potential for improved financial performance under fully public ownership (as opposed to part-government ownership), Lloyds appears to be the more enticing long-term investment option out of the two stocks.

The post Is this challenger bank set to overtake Lloyds Banking Group plc? appeared first on The Twelfth Magpie.

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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.