The median 12-month price target of sell-side and independent analysts tracked by Alacra Pulse is $19, while the mean is $18.71, substantially higher than Friday’s closing price of $11.44. Still, there are signs that some analysts are growing increasingly concerned about the potential impact of “foreclosuregate,” and are reluctantly downgrading the company.
Current 12-month price targets of selected sell-side and independent analysts. Click image to enlarge.
Even though Bank of America’s third quarter results [see transcript] were “substantially better than we expected,” Oppenheimer’s Chris Kotowski downgraded the bank to Perform from Outperform and no longer has a price target. He previously had an $18 target.
“There will be lots of suits with big numbers, and there are lots of other good stocks to own,” said Kotowski, adding that Bank of America is “disproportionately exposed” to mortgage buyback risk.
Stifel Nicolaus’ Christopher Mustascio downgraded BofA shares to Hold from Buy, but kept his target price at $20. Mustascio also cited Bank of America’s better-than-expected quarterly performance and said the ratings action was “against our better fundamental analysis/judgment.”
“This is a bitter pill for me,” said Mustascio. “I am sure some will view this action as throwing in the towel and capitulating. That criticism is probably fair and accurate. But, the most frustrating thing to me is the fact that the downgrade is not really based on fundamentals.”
“Foreclosures are everybody’s sole question right now,” said Jefferson Harralson of Keefe Bruyette and Woods. “It’s a large number, and it’s an unknown number, and that’s making people uneasy.” He has an Outperform rating and a $14 target.
Another independent analyst, Erik Oja at Standard & Poor’s, downgraded BofA to Hold from Strong Buy and lowered his target to $14 from $17. He is not confident that BofA has adequately reserved for the potential costs of the foreclosure mess.
But FBR Capital’s Paul Miller believes the concerns about BofA’s foreclosure liability are overblown. He reiterated his Outperform rating with a target of $18: “Despite the positive quarter, we note that BAC is no longer trading on fundamentals but on headlines regarding its reps and warranties exposure. As a result, share price has become tied to a currently unquantifiable liability.”
Anthony Polini at Raymond James goes a step further, seeing the 13% drop in the bank’s share price since the beginning of the month as an “outstanding buying opportunity.”
“We clearly believe the market is overdiscounting this exposure,” he wrote.
And noted banking analyst Dick Bove of Rochdale Securities also remains bullish: “I’m a long-term buyer of Bank of America because right now if you take the market cap of Bank of America it’s below the cash on its balance sheet.”
Even if the ultimate financial cost to BofA is less than the market seems to be pricing in, the continuing negative publicity is likely to keep a lid on the stock price, at least for now. And news that Fitch Ratings has placed BofA on Credit Watch Negative (along with other US banks) based on the potential impact of financial regulatory reform doesn’t help either.
So look for more analysts to trim their targets in the coming weeks.
(Sources: Alacra Pulse, TheStreet, StreetInsider, Reuters, CNBC, WSJ, The New York Times, Fitch Ratings.)