Bank of America Corporation (BAC) shares have recently pulled back this month from an uptrend that has seen shares appreciate from $7 per share in August to as high as $12 per share this month; they currently trade for $11.30. This gain of close to 70% has not gone unnoticed by investors. Currently, hedge fund managers Bruce Berkowitz, Mohnish Pabrai, Louis Bacon, and Bruce Kovner all hold shares. This pullback may be seen as a buying opportunity but, it is important to note that the stock is still hovering around its highs.
Bank of America is either going to be seen as one of this recession's great turnaround stories or a market laggard for a long time to come. Recently, it settled in court for $3.6 billion with Fannie Mae for bad loans stemming from mortgages originated by itself and acquired Countrywide. Bank of America also settled, in late September, its lawsuit from Merrill Lynch for $2.43 billion. While these settlements take a lot of liability uncertainties off of the table, new claims this quarter came in at approximately $4.5 billion indicating that BAC is not through the woods yet.
Threats to business
Income this year came in at a $0.25 per share. This may be better than some expected but net interest income declined from 2011 by 9% and due to Basel III, Bank of America is going to need to step up its earnings game or raise capital by selling more shares. More share purchases would only dilute further stock holders' portion of earnings.
As indicated above, litigation and regulations are going to play a huge part in how fast or even if Bank of America turns around. If anything is an indication of how bad things could get, there were over $2 Trillion in loans originated during the 2004-2008 period.
New management, under the leadership of CEO Brian Moynihan, has initiated plan "New BAC," which is the effort to reduce costs, settle claims and increase earnings. In part of this, BAC has consolidated its banking centers by 4% in 2011 and staff by 5%, two moves that will surely lead to cost savings and improved efficiency.
Demand for more online transactions seems to be the trend and Bank of America's scale will put it in a great position to further increases in this area. Online transactions bring lower transaction costs and should allow for even more cost savings.
Market Cap: $121.79 Billion
Dividend Yield: 0.35% ($0.04 per share) much lower than competitor Wells Fargo & Company's (WFC), which is currently paying a 2.85% dividend.
Profit Margin of only 5.03%, again much lower than Wells Fargo and JPMorgan Chase & Co. (JPM), both of which have a margin of over 20%
2012 Earnings Per Share: $0.25
2013 Earnings Per Share Estimate: $1.29
Current Share Price: $11.31
52-week Range: $6.70 - $12.42
With so much litigation and regulation uncertainty ahead for Bank of America it is hard to put an exact valuation on the stock. The range it has traded in over the last year seems to be fair, with the higher price having more to do with optimistic sentiment than performance. But, this turn around story is far from over and investors should keep an eye out for further dips as they may be perfect buying opportunities.
Disclaimer: The author is not a registered investment advisor and does not provide specific investment advice. Data is sourced from Yahoo Finance and company reports. This information is for informational purposes only. As always, please do not invest more than you can afford to lose!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.