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Bank of America (BAC) reported terrific fourth quarter earnings earlier this week, prompting the stock to move ever higher and for analysts to begin boosting their respective price targets. I have written many bullish articles on BAC over the past year or so beginning when shares were trading at $11.14, prior to the nearly 50%+ move we've seen since. This article is not about the earnings report per se, as that has been covered and covered again here on SA; in this piece, I'll revisit consensus earnings projections and what they mean for stock's valuation after the huge run up in shares.

To do this, I'll use my earnings model you can read about in greater detail here. In essence, the model takes a company's book value, expected dividends and earnings and discounts them to the present in order to find a fair value for shares; BAC's results are below.

2013

2014

2015

2016

2017

2018

2019

Earnings Forecast

Prior Year earnings per share

$0.25

$0.90

$1.31

$1.60

$1.88

$2.21

$2.60

x(1+Forecasted earnings growth)

45.60%

22.10%

17.50%

17.50%

17.50%

17.50%

=Forecasted earnings per share

$1.31

$1.60

$1.88

$2.21

$2.60

$3.05

Equity Book Value Forecasts

Equity book value at beginning of year

$20.71

$21.98

$23.38

$24.96

$26.77

$28.76

Earnings per share

$1.31

$1.60

$1.88

$2.21

$2.60

$3.05

-Dividends per share

$0.04

$0.20

$0.30

$0.40

$0.60

$0.80

=Equity book value at EOY

$20.71

$21.98

$23.38

$24.96

$26.77

$28.76

$31.01

Abnormal earnings

Equity book value at begin of year

$20.71

$21.98

$23.38

$24.96

$26.77

$28.76

x Equity cost of capital

9.50%

9.50%

9.50%

9.50%

9.50%

9.50%

9.50%

=Normal earnings

$1.97

$2.09

$2.22

$2.37

$2.54

$2.73

Forecasted EPS

$1.31

$1.60

$1.88

$2.21

$2.60

$3.05

-Normal earnings

$1.97

$2.09

$2.22

$2.37

$2.54

$2.73

=Abnormal earnings

-$0.66

-$0.49

-$0.34

-$0.16

$0.05

$0.32

Valuation

Future abnormal earnings

-$0.66

-$0.49

-$0.34

-$0.16

$0.05

$0.32

x discount factor(0.095)

0.913

0.834

0.762

0.696

0.635

0.580

=Abnormal earnings disc to present

-$0.60

-$0.41

-$0.26

-$0.11

$0.03

$0.18

Abnormal earnings in year +6

$0.32

Assumed long-term growth rate

3.00%

Value of terminal year

$4.88

Estimated share price

Sum of discounted AE over horizon

-$1.35

+PV of terminal year AE

$2.83

=PV of all AE

$1.48

+Current equity book value

$20.71

=Estimated current share price

$22.19

There is a lot going on in this model so we'll take it piece by piece to understand what is happening and what it means for BAC shares. I lifted consensus earnings estimates directly from Yahoo! Finance and plugged them into the model. I then chose a discount rate of 9.5%, which of course is subjective, but I wanted to properly assess the risk of owning BAC stock and I feel 9.5% is appropriate. The last piece was expected dividends and this was the toughest. As we all know, BAC essentially stopped paying a common dividend (except a slap-in-the-face penny per share per quarter) a few years ago because it was hemorrhaging due to poor decisions made by the bank's management in the past. However, with the company's capital structure vastly improved and earnings rolling in by the billions, I think dividends are on the horizon. Thus, I had to take guesses as to what I think payouts could look like in the coming years and while I'm sure they won't be exactly right, it should be close enough for this analysis.

When I first used this model to assess BAC, shares were trading in the low $11 range and my model assessed the fair value of shares at $15.31 at that time. Since that time, last January, shares have skyrocketed to their recent price in the low $17 area, giving investors tremendous gains. Since shares have far surpassed my original fair value assessment, it is important to update the model and understand the new fair value of BAC shares. As you can see above, that new fair value is in the area of $22 per share, or roughly $5 higher from here.

While I fully understand another $5 is an ambitious fair value, $15+ was ambitious last January but it has happened and then some since. So while it may seem a bit optimistic to call for another $5 per share in gains, I don't think it is out of the question. BAC has many tailwinds for earnings such as an improving book value, now at nearly $21, Project New BAC cutting billions in costs from the business model, improved net interest margins, increasingly positive sentiment, and an improving revenue outlook, among others. In addition, the prospect of dividends for the common stock on the horizon is likely to draw in some investors who demand income from their common shares, a group that has been neglected since BAC got into real trouble a few years ago.

I think we'll continue to see price target hikes for next couple of weeks as upward EPS revisions come in and more people realize there is a lot more value in BAC shares than $17 right now. Given the tailwinds in earnings, I think the consensus earnings estimates above are likely too conservative, as they were last January when I first wrote about BAC. Net interest margin expanded 21 basis points over last year in the fourth quarter and non-interest income was up a whopping 28%, just two ways BAC will continue to expand its revenue and margins in the coming years. Couple that with rising rates and you've got a recipe for continued, and very strong, earnings growth from BAC.

Given the stock has moved so far, if you aren't in BAC and would like to be, perhaps waiting until shares dip below $17 would be prudent. There could be some profit taking following the post earnings move, a bit of which we saw Thursday, as shares have come a very long way in not much time. However, I feel strong conviction that my fair value of $22 is plausible and achievable and highlights that BAC's business has actually improved even more quickly than the share price would indicate. As hard as that is to believe following a 50%+ move, the numbers speak for themselves. BAC's turnaround is largely complete but there is a lot more left in the earnings potential of this company. The value is beginning to be realized by the market and the stock is moving up accordingly, and while I don't think another 50% move is in the cards for 2014, we aren't done yet either.

Source: Bank Of America: Why My 'Shares Will Double' Call May Prove Conservative