- Bank Of America's share price isn't fully reflecting its turnaround progress.
- Management should think outside the box in unlocking shareholder value.
- A simple press release stating a line in the sand would go a long way towards unlocking value in BAC shares.
When Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) announced in September of 2011 that it was defending its share price, I found it to be a very innovative and ingenious way to boost its share price without spending a dime. Shares of BRK.A were about $107K when the announcement was made and subsequently rose to $120K in a straight line on the back of the news in short order. I'm sure it's been done before but I've never heard of a company taking the reins on its share price and boosting shareholder value without spending any money; a simple press release created ~$21 billion in wealth. It is this kind of action I'm challenging Bank of America (NYSE:BAC) management to perform in order to boost the still-cheap share price.
BAC's share price, although very strong over the past couple of years, still has much unlocked value in my view. Shares trade at a discount using any number of metrics including price to sales, PEG and book value measures, to its three too-big-too-fail competitors in JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC). While the case could be made that BAC should trade at a discount to some of these competitors, I believe BAC's franchise is improving more quickly than the share price would indicate. Thus, I think BAC management should do something out-of-the-box to remedy that situation more quickly than it otherwise would be.
In particular, I think BAC management should just copy what Berkshire did and put out a press release that draws a line in the sand for the share price. It worked wonders for BRK shareholders and I don't doubt it would do the same for holders of BAC. I would like to see management put a target price on BAC shares without explicitly stating as much. In essence, that's what Berkshire did - it decided 110% of book value was the bottom - and BAC could do the same. It could do so in any number of ways but there are a couple I think would have the biggest impact.
It could go the traditional book value route that Berkshire used and set a target for shares. With book value at $20.75 as of the most recent quarter BAC could simply use Berkshire's target of 110% of book value as the line in the sand. This would effectively ensure BAC is buying back stock continuously for a while until the share price catches up with book value but I do believe that the declaration from management that the share price will be aggressively defended is one that would get a positive reaction from investors. And since BAC is already committed to buying back stock I don't think it would be a material change in the capital return plan; it would simply set a target for a slowdown of the buyback. The signal to investors is what's important here and not the mechanics of the program.
BAC could also go with the tangible book value route and create a target of perhaps 150% of tangible book value. This is a reasonably cheap multiple of book value but BAC is not close as of this writing. This would be a more useful target in my view considering BAC is a bank but it is less recognizable to investors. At any rate, the target itself isn't all that important; what's important is that there is a target.
Now, BAC has some challenges to doing this that Berkshire doesn't and the main one is the CCAR process. Annual stress testing means BAC has to get its capital return plans approved by the Fed each year and as Citi found out, it isn't a walk in the park. BAC would have to ensure it had enough excess capital that it could convince investors it was able to defend the share price if it should fall low enough. In fact, with shares trading where they are, setting any reasonable book value target would require aggressive buying right now. This is something management would need to take into consideration before making such an announcement. But with BAC's fundamentals improving so rapidly over the past couple of years, I don't doubt it would be able to fulfill its promise.
A "line in the sand" press release from BAC would, I believe, unlock billions in shareholder value. Not only would it provide a bottom in the share price but it would signal to investors that management has the utmost confidence in the business. I believe that upper management already believes in BAC wholeheartedly but I still think the traditional buyback program isn't enough to excite investors. If BAC went an innovative route like Berkshire did and were to make an announcement of where it will aggressively defend the share price, I think we'd see significant value unlocked. The announcement itself would likely be worth a few percentage points on the stock and it would provide a target price for shares. BAC management is doing a terrific job fixing the mess their predecessors left but the share price isn't fully reflecting that reality. I think it's time for them to get creative and boost shareholder value with the stroke of a pen.
Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.