Wednesday tips round-up: Barclays, Merlin Entertainments

Sentiment may have turned on shares of Barclays. The stock has risen 15% over the last six months, outperforming other UK banks and its universal European peers. Hence, the lender’s stock now changes hands at 0.8 times book value, versus 0.6 times before. But a vote of confidence from investors would be in the region of 1.0 rather.

That is just as well for it does not yet merit a full vote of confidence. Management is making progress but some of its old problems continue to dog the firm. The constant and unpredictable drip of misconduct charges has put off investors. There also continue to be concerns surrounding its investment bank, the unit which employs the second most equity. Barclays is shrinking it, but profits are dropping even faster, resulting in a “just awful” return on equity (RoE) of 2.7% at that division. On the upside, operating costs and bad loan impairment charges are coming down. At 10.3% Barclays’s capital position now looks reasonable too. However, at 10.5% its cost of equity continues to overshadow its total RoE, which is only at 5.1%. The bank’s chief has his work cut out for him still, the Financial Times’s Lex column writes.

The recent exit of Blackstone and CVC from their investment in Merlin Entertainments was well-timed and is unsurprising. After a successful flotation and given the shares were at a record high it was to be expected. Hence, the scant reaction in the stock’s price.

Were they too well-timed, perhaps? Analysts do expect like-for-like sales to revert from last year’s rise of 7.1% to a more normal 4% this year. In parallel, capital expenditures are expected to pick back up. Even so, the company generates a reliable stream of income. Don’t expect much immediate outperformance, “but that reliability justifies a long-term buy,” says The Times’s Tempus.