I have not covered my position in Bank of America (BAC) in these pages for over six months. It seems to be an appropriate time to revisit this stake as the bank recently reported earnings. In addition, Warren Buffett recently took stock in General Electric and exchanged some 10.7mm warrants that he has held since the financial crisis as they were about to expire. The Oracle of Omaha has a similar arrangement with Bank of America. The shares also seem like a good value for long term value investors who follow Buffett's much quoted favorite holding period on a stock "Forever".
The company reported earnings of 20 cents a share, one cent above consensus. Among other positive highlights within the earnings report included:
- A consumer credit card loss rate of 3.47% that was the lowest since Q1 2006.
- Noninterest expense of $16.4B which was down from $17.5B a year ago as the company's cost cutting efforts bear fruit. Mobile banking customers also were up 26% to 14M which should help the bank cut costs in the future.
- Total revenue came in at $21.7B compared to $20.6B last year.
- Net interest margin of 2.44% was up 12 basis points from last year's Q3.
Note: One of the immediate results of the earnings report was that Evercore raised their earnings estimates and price target on BAC going forward. The analyst firm now sees 2013 EPS of $1 from $0.91, 2014 to $1.36 from $1.30, 2015 to $1.63 from $1.52. The price target was raised to $17 from $16.
Buffett's Stake: The Oracle of Omaha has warrants to buy up 700mm shares until 2021 at just over $7 a share. Given the warrants have some 8 years to run and Buffett's long term focus, I think investors can count on the legendary value investor holding onto his stake. He will also, I am quite certain, note his holding in BAC often in myriad interviews over that time span. Both of which can be viewed as a positive.
Valuation and other catalysts:
As business conditions improve, credit losses should continue to decline. In addition, JPMorgan (JPM) seems to have become the Fed's favorite "whipping boy" since their CEO had the audacity to question publicly some of the rules of Dodd-Frank and other regulatory overreach. Bank of America had previously held this unfortunate post for a few years following the housing crisis.
The stock sells for ~70% of book value. In addition, earnings are on a significant up ramp. The bank posted earnings per share of only a quarter in 2012 but is tracking to around 90 cents a share in profit this fiscal year. The consensus earnings estimate has BofA making over $1.30 a share in FY2014. Finally, although the shares pay only a .3% dividend yield currently, look for that to increase substantially in the coming years as the company puts its credit, regulatory and litigation problems behind it. Prior to the financial crisis, the bank was among the biggest dividend payers among major financial institutions. Long Term Buy