Bank of America Corp. (BAC) led the Dow Jones Industrial Average lower today after shortfalls in mortgage banking and trading marred first-quarter earnings and slowed the company's turnaround.
The Charlotte, N.C.-based bank generated net income of $2.6 billion, or 20 cents per share, on $23.7 billion of revenue, but failed to meet analysts' estimates of 22 cents per share, on revenue of $23.4 billion. While profits quadrupled from a year earlier, most of the gains are related to the bank's efforts to clean up its balance sheet, leaving investors unimpressed.
Bank of America settled three major class action lawsuits related to Countrywide's mortgages, paying $500 million to settle with shareholders who filed lawsuits between 2005 and 2007. On pending litigation, chief financial officer Bruce Thompson said on an analyst call: "No one will ever declare a complete victory, but we are moving through the pipeline of items in a pretty meaningful way."
Still, with what's seen as a bloated cost base, analysts have been closely watching how quickly the bank can cut expenses. Bank of America managed to shed $1 billion of expenses from last year, bringing the total to $18.2 billion. One of the biggest problems the company has faced is its clean-up efforts cutting into profits in recent quarters. Fourth-quarter earnings included a number of one-time litigation charges related to its lending and foreclosure practices.
After leading the Dow average in 2012, Bank of America is trailing broad market benchmarks and most of its peers this year. The firm's 5.8 percent advance through yesterday to $12.28 compares with 13 percent for the Dow and 8.5 percent for the 24- company KBW Bank Index. The bank was the last of the four biggest U.S. lenders to report results. JPMorgan Chase & Co. (JPM) , the largest U.S. bank, said earnings rose 33 percent to a record as credit quality improved. Wells Fargo & Co. (WFC)'s record income increased 22 percent aided by cost cuts and Citigroup Inc. (C) posted a 30 percent rise as results from fixed-income trading and investment banking beat estimates. With the other financial institution reporting record results, investors are inevitably asking themselves: is Bank of America a virtuous investing opportunity?
Why You Should Consider
Despite the recent reporting disappointment, investors certainly should not shy away from Bank of America just yet. CEO Brian Moynihan has broadcasted a number of forthcoming plans for the company and recently announced Bank of America's new marketing campaign. Advertisements emphasize the ways people and corporations are assisted by the lender with the tagline "Life's better when we're connected." The firm's previous slogan was "Bank of Opportunity." To improve revenue, which slid 11 percent to $84.2 billion last year, Moynihan is setting new targets for regional managers to boost sales and pushing them to get existing customers to take more products, people with knowledge of the effort have said. Moynihan summoned more than 100 of the leaders to Chicago this month to discuss the initiative.
Furthermore, based on the newly released end-of-first-quarter balance sheet data, Bank of America shares are changing hands at roughly a 10% discount to their tangible book value this morning, and they still look like an attractive (i.e., underpriced) risk to me. As you can see in the chart below, the 50 and 200 day moving averages are rising - indicating a bullish trend. BAC is currently trading at $11.61 with support at $11.76 - a suggestion of a potential buy.
Bank of America's stock doubled in 2012, and despite today's decline, I wouldn't be surprised if we saw in continue its uptrend for the rest of 2013. With significant challenges still ahead, it's critical that investors pay attention to this stock over the next few day and possibility consider in the near future. With positive growth initiatives, expense clean-up efforts, and the company currently trading at a discount, I think Bank of America is a solid option for any value investor looking for a steal.