Barclays: UK Banking Leader at Discount to Tangible Book Value

Brian Pitkin of URI Capital Management presented his in-depth investment thesis on Barclays (NYSE: BCS) at Best Ideas 2018.

Barclays trades at roughly 60% of book value. Its recent annual earnings and returns have been frustratingly low. Legacy fines and costs, low interest rates, and a generally anemic banking environment have led to elevated costs and low returns, masking the earnings power of two enduring business: the UK consumer and business bank (Barclays UK) and the transatlantic corporate and investment bank (Barclays International). Meanwhile, Barclays ADRs trade around $10 while book value per ADR is over $17 and tangible book value per ADR exceeds $15. Based on these metrics alone, Brian believes he is investing with a wide margin of safety while allowing for the possibility of outsized returns. As for what is possible over the medium term, Barclays has targeted returns on tangible equity exceeding 10% in 2020 as headwinds abate. Brian considers a couple of paths to future value: Assuming book value and tangible book value increase by an average of 8% per year in the coming years, Brian sees book value per ADR exceeding $20 and tangible book value per ADR exceeding $17. Assuming 10% returns on tangible equity to $17 per share of tangible book value, Brian sees medium-term earnings of $1.70. Ascribing a 12x multiple to such earnings brings value above $20. Brian also looks to book value per ADR as a source of value, which will exceed $20.

About the instructor:

Brian E. Pitkin founded URI Capital Management to follow his long time passion for deep business analysis and long term value investing. Brian began his career in Investment Banking at Merrill Lynch in Chicago, and then joined The Edgewater Funds, a Chicago private equity firm. Brian ultimately returned to family-owned Ulrich Chemical, a Midwest chemical distributor where he helped accelerate both top and bottom line growth, including a near tripling of the company’s bottom line. He then helped negotiate and execute the sale of Ulrich to Brenntag, a global chemical distributor, before leaving to start his own ventures, now dominated by managing the fund URI Capital Partners. His background in both investing and managing businesses has contributed to his understanding of what makes for a successful business and thus a successful long term investment, while faith and family provide a strong foundation for the entirety of his life. URI Capital Partners is a long only investment fund focused on a highly concentrated portfolio of publicly traded companies. While our concentrated, long only strategy may present more volatility in the short term, we are not willing to sacrifice higher potential longer term returns for a more comfortable journey. Investing in enduring businesses at good valuations, avoiding leverage requiring margins of safety serves to solidify our foundation and protect investor dollars.

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