- Bank of America's diverse segments bring their own value to the consolidated company.
- Two segments detract from the overall value of the company.
- A case is made that BAC is substantially undervalued from its intrinsic value.
Over the past couple of weeks, I've highlighted each of Bank of America's (NYSE:BAC) business segments, forecasting revenue and profits for 2014. In doing this, I hope to gain some perspective as to the sum-of-the-parts valuation of the financial behemoth. Well, the time has come to aggregate my findings and assign a value to BAC shares based upon them. To recap, I highlighted Consumer and Business Banking, Consumer Real Estate Services, Global Wealth And Investment Management, Global Banking, Global Markets, and All Other. The entirety of BAC's business is comprised of these categories and as such, assigning a value to each category should net us a total value for the entire company.
As a note, in this article I won't spend time recapping the segment details as those are available in the linked articles above; we will simply perform the valuation exercise at this point.
For Consumer Business and Banking, I am looking for $30 billion in revenue for 2014 and net income of $7.1 billion. CBB is the "banking" portion of BAC and as a result, will earn a smaller multiple than some of BAC's other segments. Thus, I think 11 times earnings is fair considering the decent profitability and earnings growth the segment has experienced. Things are certainly on the mend at CBB and 11 is a fair multiple in my view for a large, profitable commercial bank.
Consumer Real Estate Services is a bear to say the least and it is difficult to wrap one's head around exactly what this segment owns. However, I called for net revenue in the $7.5 billion area and a net loss of $3.5 billion. Obviously, there is no earnings multiple as it has negative earnings so CRES will simply drag down the overall value of BAC once the exercise is complete.
Next up, Global Wealth and Investment Management is perhaps the most prized possession in BAC's portfolio. I called for $19 billion in total revenue and $3.7 billion in net income for 2014 at GWIM. Since GWIM is a low risk business that is not subject to material credit losses, combined with the fact that it is growing earnings at a steady and rapid rate, I think an earnings multiple of 19 is fair. This is a terrific business and anyone would be lucky to own it.
Global Banking is next and in my article, I forecast $16.7 billion in net revenue and a whopping $5.8 billion in net income. Given the cyclicality of GB's business and the fact that it is subject to potentially material credit losses, I think an earnings multiple of 14 is fair. The business is still very profitable and is a cash cow for BAC but its earnings volatility may turn off some investors.
The Global Markets segment is another very profitable business for BAC and it is becoming increasingly so in the past few years. I forecast $16.3 billion in net revenue for this business and $2 billion in net profits, an ambitious goal based upon lower expenses and credit losses. However, with the way this business is growing profits and its lucrative business lines, I think an earnings multiple of 19 is appropriate. If this were a standalone business I don't think it would have any problem commanding that earnings multiple.
Finally, the All Other segment was challenging to forecast, to say the least. I'm looking for $2 billion in net revenue and break even on the profit side. As there is no profit forecast, I cannot assign a multiple but note that this is the most volatile and unpredictable segment in BAC. Thus, any forecast could change materially as the year goes on.
So what do we have then? My net revenue forecasts add up to $91.5 billion for 2014, or about $3 billion more than analysts are expecting. On the profit side, I've forecast $15.1 billion in net income, or $1.44 in EPS. This doesn't take into account BAC's legal liabilities and since those are potentially significant, that EPS number could eventually come way down. Analysts are calling for only 93 cents and I think that is very achievable considering the fact that these estimates have been ratcheted down so fervently in the past couple of months. In addition, sentiment is as bad as I've seen it so hopefully, that marks the bottom for earnings estimates.
Using these numbers and my earnings multiple estimates, we get values for the individual business lines as follows: CBB--$78 billion, CRES--$0, GWIM--$70 billion, Global Banking--$80 billion, Global Markets--$38 billion, All Other--$0. Now, these values add up to $266 billion, a significant premium to BAC's current market value of $153 billion. Of course, CRES and All Other are likely detracting from the overall value of BAC as businesses that lose money aren't valued at zero but some negative number that is difficult to forecast. If we take the full company's earnings multiple and subtract CRES and All Other, I think they're probably collectively removing $40 billion or so of market cap due to their losses. In other words, if these businesses were breaking even, they would be worth $40 billion more than they are now. Thus, I think a sum-of-the-parts valuation for BAC is something like $226 billion. This is still a significant premium to the current value and implies a fair value price of $21.48 for the entire business.
It's important to note that I've utilized significant assumptions in my analysis and that any of them are open to interpretation. I've been open about my reasons and have made estimations to the best of my ability. I honestly think BAC is worth something like $21 a share but Mr. Market disagrees at the moment. Time will tell but I think we've got significant value to be unlocked with shares trading at $14 and change. If nothing else, this exercise highlights some of the gems and duds in BAC's portfolio and shows that much of what BAC does is actually worth a lot of money, contrary to what the bears would say. It has been an interesting learning experience for me and I hope you gained something from it as well.