There are very few companies more out of favor than Bank of America (BAC) at the moment. The stories that business journalists keep telling us about Bank of America are overwhelmingly negative:
- Bank of America being sued for $10 billion by AIG (AIG)
- Bank of America being sued for $50 billion by shareholders
- Bank of America settles mortgage lawsuit for $8.5 billion
- Bank of America losing customers to debit fees
- Bank of America losing billions from Countrywide acquisition
- Bank of America gets dividend hike rejected by Federal Reserve
- Bank of America sells stake in China Construction Bank to raise capital
- Credit agencies downgrade Bank of America
- Caps on debit card fees for merchants to cost Bank of America hundreds of millions
The only people that loath Bank of America more than Wall Street protestors are investors who owned the stock the past few years. Who in their right mind would invest in Bank of America today? That is, aside from one of the greatest investors ever, Warren Buffett?
There is a lot of uncertainty about the predictability of Bank of America’s earnings going forward. Calculating intrinsic value is very difficult when there is so much uncertainty. It is very true that despite its challenges, Bank of America does have some intrinsic value. It is not a “sell” at any price.
If I offered you the whole company of Bank of America for $100, you would take it. What if I offered it to you for $1 million? That is still an unrealistic deal that’s too good to be true. What about $1 billion? With a tangible book value of $144 billion, this would be the deal of the century.
If Bank of America earns a profit in 2012 and continues to thereafter, it is fair to say that Bank of America should sell near tangible book value. According to YahooFinance, 30 analysts that follow the company estimate 2012 EPS to be $0.54 - $1.65, with the average being $1.01. That, to you, should mean very little. These analysts have no idea how much future write-offs of assets will be, nor do they know what will happen in lingering lawsuits. What it does say is that despite all of the negative stories and challenges Bank of America faces, all 30 analysts that closely follow the company believe it will be profitable in 2012.
Merrill Lynch earned $5 billion in 2006 and over $7 billion in 2007. That is what it is capable of earning in good times. This year Merrill Lynch is on pace to earn in that range.
Countrywide earned $2.5 billion at its peak in 2006. It is unlikely to earn that much again soon, given its challenges. One day it should be able to contribute $2 billion to Bank of America’s bottom line.
Bank of America, before purchasing Countrywide and Merrill Lynch, earned $21 billion in 2006—an unusually spectacular year. In 2007, a more normal year, it earned $15 billion. In other words, after huge write-offs stop and business is back to normal, Bank of America, Countrywide, and Merrill Lynch should be a combined company earning roughly $20 billion a year or more. With a current market value of $75 billion, there is tremendous upside potential.
Based on Bank of America’s ability to earn $20 billion in a normal environment and a tangible book value of $140 billion, Bank of America appears undervalued with a market value of only $75 billion.