I added more shares of Bank of America (BAC) through my DRIP plan today. Shares of Bank of America trade at just $13.46. The stock has been punished due to its lackluster earnings report and the expected negative impact that financial reform may have on BofA’s earnings. Let’s take a look at the pros and cons of investing in Bank of America.
The negatives for Bank of America are as follows:
Credit losses continue to rise as delinquency rates are increasing. Bank of America has tremendous exposure to the real estate market and credit card market.
Financial reform is expected to put a cap on interchange rates. This would severely impact debit card fee income.
Trading revenues dropped substantially after bolstering the bank in Q1.
Much of last quarter’s profitability was due to one time gains such as the sales of bank assets.
So, why should you buy the shares?
Bank of America trades at a discount to book value. The bank’s earnings power is still incredibly strong. Fee income could easily offset any future losses. I expect Bank of America to find new ways of generating fee income by charging for services that used to be free. Increased checking account service charges and increased account activity fees.
The large deposit base gives Bank of America the cheapest form of capital. Bank of America has enough cash reserves to weather any economic downturn.
The downside is already baked into the stock’s price. Analysts have been rushing to downgrade shares of BofA. This is a bank that could easily earn $3 a share in in 5 years. Even if Bank of America only earns $2 per share 3 years from now, the stock still only trades at just 6.5 times earnings.
This is definitely not an overnight play. It may take years for things to shake out at Bank of America. However, I think that patient long term investors will be rewarded when the economy rebounds.
Disclosure: I do own shares of Bank of America.