Bank of America (BAC) has been in bad shape for a while; ever since the Countrywide and Merrill Lynch acquisitions. Shares seemed to have recovered in 2010, only to reapproach the 2009 lows set at the depths of the recession.
For competitive analysis, Bank of America is one of the world's largest financial institutions, serving individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 58 million consumer and small business relationships with approximately 5,700 retail banking offices and approximately 17,800 ATMs and online banking with 30 million active users.
Bank of America is among the world's leading wealth management companies, and is a global leader in corporate and investment banking and trading across a broad range of asset classes. BAC serves corporations, governments, institutions and individuals around the world.
Here are five points investors should take into considering while looking at the big bank.
Valuation
Bank of America’s 5 year valuation ranges for P/S, P/E, and P/B ratios tell a mixed story. Bank of America’s current P/S ratio is 0.5, and it has averaged 1.3 over the past 5 years with a low of 0.3 and a high of 2.1. The stock has a negative P/E ratio. For comparison purposes, over the past 5 years the stock has averaged 17.2 with a low of 9.1 and a high of 36.7. Bank of America’s P/B ratio is 0.3 with a 5 year average of 0.9 with a low of 0.3 and a high of 1.8. As has been suggested by analysts and market commentators, the falling P/B ratio suggests that investors are becoming more and more skeptical about the assets on the bank’s books.
Price Target
Analysts are very bullish on the stock. The consensus target for the analysts who follow Bank of America is $10. That is upside of nearly 80% from current prices.
Forward Valuation
Analysts expect EPS of $0.96 for Bank of America in FY12. That implies that the bank is trading 5.8x FY12 EPS. Bank of America’s closest competitors are Citigroup (C) and JPMorgan Chase (JPM). Citigroup trades at for 6.3x FY12 EPS. JPMorgan Chase trades for 6.9x FY12 EPS. Other large domestic banks include US Bancorp (USB) and Wells Fargo (WFC). US Bancorp trades for 10.4x FY12 EPS while Wells Fargo trades for 8.6x FY12 EPS. JPMorgan’s and Citigroup’s valuations suggest that if Bank of America is undervalued, it is by a small margin.
Invest Alongside Warren Buffett
On August 25, 2011, Bank of America Corporation reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, run by Warren Buffett, in a private offering. The preferred stock has a dividend of 6% per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5% premium. In conjunction with this agreement, Berkshire Hathaway also received warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share.
Although investing in Bank of America’s equity is different than Warren Buffett’s investment, it is nice to invest alongside Warren Buffett. His investment in preferred shares at least suggests that he doesn’t think the company is in trouble and is going to file for bankruptcy.
Price Action
The stock has been in a freefall since mid-Spring; however, it seems like that it is starting to find some support in the $5 area.
Conclusion
I think it is too early to make an investment in Bank of America with the difficulty of figuring out what it has on its books and how much the different loans and assets are worth. However, knowing Warren Buffett’s track record, it may not be a bad idea to look further into Bank of America’s mortgage loans that have been causing it a lot of trouble. However, on a technical basis, shares are forming a classic "w" and could be headed up from here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
