Getting Bank of America's Share Price Recovery in Perspective

I was reading 2 different analyst opinions of Bank of America (BAC) on CNBC.com. One analyst stated that Bank of America had seen a tremendous run up and would languish between $5 and $10 for the next few years. Another analyst stated that he thinks that BOA’s stock will double over the next year and triple over the next 2 years. Both of these analysts cannot be correct So who is right?

Noted analyst Dick Bove stated that Bank of America’s can earn $3 per share in a normalized earnings environment. I believe that Bove is correct with his assessment of the earnings power of Bank of America. Bank of America now owns the largest mortgage provider in Countrywide and one of the premier brokerage firms in Merrill Lynch. These brands should generate significant revenue when the economy rebounds. But I do think that Bove’s timing may be off. The key question is when will Bank of America operate in a normalized earnings environment?

I think it will take much longer then a year or two for Bank of America to see normalized earnings. The economy has not yet bottomed and Bank of America is still facing issues with rising credit card loan delinquencies and mortgage foreclosures. The banking giant may face an additional $50 billion in losses over the next few years. B of A also still has to repay $45 billion in TARP commitments. As much of B of A says that it wants to pay back the TARP money as soon as possible; I think it says a lot that the bank did not repay the money when other financial institutions did. Bank of America’s 33 billion dollar equity offering will dilute earnings for the foreseeable future.

While I don’t believe that Bank of America will languish in the single digits for years; I do think that the stock will take longer then 2 years to realize the price appreciation that some analysts are expecting. It appears that while analysts were way too pessimistic when it appeared that the great depression 2 was occurring; analysts are way too optimistic now that the economy has not fallen off a cliff.

Comments

[ebschor:]

I hope they are both right, but think the author is correct that it is only Bove who is correct, but his timing is off by about a year.

A pullback of BAC into the $5 - $10 range would provide a buying opportunity for investors who did not have the free cash to invest during the March lows. I don't think we'll see $10 again, but I really hope I'm wrong. Credit cards and commercial real estate could prove me wrong.

As for the TARP commitments, the recent raise of $33+ billion in fresh capital and the issuance of non-Gov't supported debt put BAC in a position to pay back the TARP. I think Lewis is correct when he forecasts end of 2009 / 2010 as the target. Remember, when he first received the TARP we were told to expect the payback to happen in 3 years and for the dividend to be $0.04/year for that period of time. Paying back the TARP early also opens the door for resetting the dividend to pre-TARP levels.

Jul 01 07:32 AM

[risk interest:]

think there is a missing factor in evaluating the upside of B of A. When the stock was trading in the 50's, it did not own Merrill LI ynch. The subsequent acquisition of Merrill with TARP funds should be reconciled with a major new acquisition. Thus, if the earnings gained from Merrill combined with meaningful boost in the bank's earning potential (without accounting for income gained from Merrill ownership) it seems to me that there is a good possibility for a major jump in share price even to extent of regaining its past moment um in the 50's.


On Jul 01 07:32 AM ebschor wrote:

> I hope they are both right, but think the author is correct that
> it is only Bove who is correct, but his timing is off by about a
> year.
>
> A pullback of BAC into the $5 - $10 range would provide a buying
> opportunity for investors who did not have the free cash to invest
> during the March lows. I don't think we'll see $10 again, but I really
> hope I'm wrong. Credit cards and commercial real estate could prove
> me wrong.
>
> As for the TARP commitments, the recent raise of $33+ billion in
> fresh capital and the issuance of non-Gov't supported debt put BAC
> in a position to pay back the TARP. I think Lewis is correct when
> he forecasts end of 2009 / 2010 as the target. Remember, when he
> first received the TARP we were told to expect the payback to happen
> in 3 years and for the dividend to be $0.04/year for that period
> of time. Paying back the TARP early also opens the door for resetting
> the dividend to pre-TARP levels.

Jul 01 08:13 AM

[FloridaBoy2:]

Thanks for the article. Ken Lewis sent 200 people to look at Merrills' books. I do not believe any of the analysts have the ability to evaluate an entity as complex as B of A. It will survive because it has been blessed by the government. Predicting the future price is like reading tea leaves. Do I thnk it is a good long term investment? Yes. B of A still has to deal with all the poo on Merril's balance sheet but that may have a silver lining. What do you think?

Jul 01 08:42 AM

[paean:]

Pile in now, and keep buying till the P/B hits 1.8.

Jul 01 09:18 AM

[HChang:]

i will be a big buyer if it ever drops below $10. in fact i had been waiting to buy at $11 for 2 months but it only got higher and higher. fat hope, i might as well buy at $13 and slip it under the pillow for a year or two.

Jul 01 09:52 AM

[buyforeclos...:]

agreed ... funny stock. I really wish we KNEW exactly what their liabilities are....I mean transparent, not the BS accounting methods they use...I want to know projected losses on loans res/commercial and credit card defaults for the next 2 years.... that is what I want to know before buying in.... never any good DD available to shareholders

Jul 01 11:10 AM

[Slimsum:]

I'll buy BOA when they tell me what the truth is about the loss they took on CountryWide, when they finally come clean about how much of a loss they are sitting on with Merrill, and the banking God's forbid, when they admit too how much toxic mortgage holdings they really might have. In the meantime, there are too many other opportunities to put my money into.

Jul 01 11:44 AM

[FloridaBoy2:]

The balance sheets of the major banks are a unknown right now and I still believe it would take a huge team of analysts to decipher them.They are making money due to the yield curve, additional fees and raising interest rates on cards. I have a B of A business card that had an 8.9% rate that was supposed to be fixed. I do not carry a balance.I was just notified that the rate is now 18.99%. They will write off the bad loans and when they sell the 'other real estate owned'.

Jul 01 01:10 PM

[BOA SHAREHO...:]

There is one important factor that could generate a very fast recovery for Bank of America. As real estate recovers, the toxic assest that BOA holds will improve and could even return to near or greater than original values. Thus the debt that BOA now has would be greatly diminished.

As real estate improves into next year, BOA will most likely have skyrocketing earnings and I predict a share price of $ 35 - $ 40.

Jul 03 01:03 PM