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Bank of America (NYSE:BAC) reports its fourth quarter earnings on the morning of Wednesday January 15, 2014. The company holds its conference call at 8:30 AM ET Wednesday. Our report seeks to understand what the numbers seem to be saying about this coming EPS report. I do not have my own earnings model for Bank of America, and so am not suggesting anything based on my own study of operational results and construction of forecasts. Rather, we are basing our research here on the trends and data found about analysts' estimates.

Analyst Estimates

The mean of the estimates of 29 analysts shows that Bank of America is expected to earn $0.26 this quarter (median estimate is $0.27), but the range of estimates spans from $0.20 on the low end up to $0.31 according to the most optimistic analyst. This is a wide range of possibilities, but no matter what Bank of America does this quarter, it will be significantly better than the $0.03 it made in last year's Q4.

The Questionable Whisper Number

According to Earnings Whispers, the whisper number is $0.31, which is four cents higher than it sees the consensus estimate for the quarter (or $0.27 per share). That's about 15% better than the median estimate of $0.27.

Based simply on the whisper number, it looks like Bank of America might beat the consensus estimate this quarter, but I do not believe the whisper number is even worth talking about here. If it is worth its weight, then it seems challenging to overcome. Furthermore, it suggests trouble for a stock that has already well-progressed upward since the last earnings report.

(click to enlarge)

Chart at Yahoo Finance

Here's why I think it's not worth our attention. After missing expectations three quarters prior, over the last two quarters, Bank of America has beaten the consensus estimate by two cents (11%) and by seven cents (28%). Based on this extremely limited information, someone might say there is a chance for another double-digit percentage beat. Take note though that the average of 2 and 7 is 4.5, which is about the amount that the whisper number exceeds the consensus estimate by. It's my view that the science behind the whisper for BAC's Q4 result is unsound and probably not based on channel checks or pseudo-insider wisdom like you might think. I think there's a good chance it's a simple average of two figures. Considering then, that this might be the average of just two data points, I think investors should not give it too much credence to it in the BAC case.

EPS Estimate Trend

One thing bothers me slightly though; it's the fact that earnings estimates have trended lower over the last week and also 90 days. A quarter ago, the consensus EPS estimate for Q4 was set at $0.28, but through most of the quarter it sat at $0.27. Over the last seven days, it eased lower to $0.26.

As a former analyst, I know that most of the time corporate management teams set forward expectations through guidance provided at the prior quarter reporting, though guidance is sometimes updated during a quarter. Guidance is nearly universally set at a point at which subject companies believe it to be conservative. By doing so, and if they are able to accurately predict their quarters, they set a low bar to hurdle. I expect this is the reason why we see the 90 day change from $0.28 to $0.27. However, the last minute decrease in estimate here probably is for another reason.

Analysts will review their models and their expectations ahead of earnings season, making adjustments for changes in factors influencing operations. In this case, one dynamic factor is interest rates. Considering the actively shifting rate environment, we can understand why an analyst or two may be making changes to their estimates ahead of the report.

However, not every analyst is on top of his game, and some do not get close to scoring until the last minute if ever. You'll note that in many cases, the range of estimates is tight, though in this case there seems to be a couple brave souls. I would bet that the consensus estimate hardly ever varies except when guided that way by the company itself. I personally knew analysts who never strayed a point or two from consensus, either due to negligent due diligence or fear of failing, or both. In the case of the one point decline at the last minute here, it may be due to a few analysts on the fringe coming closer to consensus, and perhaps even setting the bar low themselves.

Even while the December quarter has seen adjustment, the March quarter estimate has remained steady, which could be a good sign. If significant, it could be a sign that indicates whatever is seen affecting this quarter's results will not hold through next quarter. Or, the contrast in change versus no change may simply reflect uncertainty.

However, the consensus estimate for the forward year 2014 has steadily declined over the last 90 days, from $1.35 to $1.31. I believe this is because changes in interest rates and expectations for higher rates have moderated a bit from previously better expectations for the company's net interest margin. Also, the housing recovery has seemed to slow a bit, though activity has picked up more recently. Economic data has been mixed, with GDP data reflecting better than recently poor labor data. Analysts have much better visibility into the current quarter than the year ahead, or the year after that, so we should not read too much into this. In any event, the company itself should update this data at its earnings report, and a lower bar works better for shareholders should the company offer better guidance.

Things to Look for

That said, there is risk, because if the company guides with less enthusiasm about 2014, even a strong Q4 result could be muted. There is good news though for BAC shareholders. J.P. Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) report their results on today, so investors can look to those reports and conference calls for information that might be useful in understanding what might follow for Bank of America on Wednesday. The component businesses of each of these banks bear varying weights, so the bottom line figures will matter less than the data that is important for Bank of America. I would pay particular attention to what Wells Fargo and J.P. Morgan say about lending generally and about the housing market. We know stocks have performed wonderfully, so Bank of America should benefit from a tailwind from its asset management business.


Given the rise over the last three months, the stock price would seem to reflect some risk. This may be part of the reason for yesterday's drop-off of 2.0%. However, on a valuation basis, Bank of America remains cheaper in terms of price-to-book value than its peers, and seems to have significantly greater upside than rivals. However, it also faces book value erosion risk, which puts that valuation discount into better perspective. We covered all this in our last piece about Bank of America, in which I indicated the stock is my favorite idea in the real estate relatives this year. There remains some risk around the earnings report, but no matter what the result, I expect the stock will be trading at a significantly higher price in a year's time nonetheless.

Source: Bank Of America EPS Preview By The Numbers