Is A 63 Cent Dollar Too Good To Pass Up?

| About: Bank of (BAC)


Bank of America followed other banks and released fourth quarter earnings this week.

Bank of America beat the consensus earnings estimate.

Higher trading revenues and credit provisions due to the energy crisis were the big takeaway.

BAC has effectively become a 63 cent dollar.

Bank of America (NYSE:BAC) was the next bank in line to report fourth quarter earnings on Tuesday, and the Wall Street giant did not disappoint. After JP Morgan Chase (NYSE:JPM) and Citigroup (NYSE:C) released Q4-15 results last week that beat consensus estimates, Bank of America followed suit and beat on earnings, too.

Though Bank of America's fourth quarter was a good one for the bank, Mr. Market has got no love for stocks right now, and that includes bank stocks. Year-to-date, Bank of America's shares have already crashed ~15% (!), a terrifying amount considering that earnings season for big banks so far has been quite good.

A solid quarter, but that doesn't help if nobody cares...

Bank of America said it had total revenues, net of interest expenses of $19.53 billion in the fourth quarter. That was 4.3% higher than the $18.73 billion the bank pulled in a year ago. The big takeaway for shareholders yesterday was that trading revenues came in stronger than expected, and that the bank is taking precautions with respect to its energy loan book in light of crashing crude oil prices.

In terms of its sales and trading business, Bank of America raked in $2.6 billion in revenues in the last quarter as compared to $2.4 billion a year ago, which was stronger than expected. FICC revenues, which includes revenues from fixed income, currencies and commodities, rose $0.3 billion, or 20% Y/Y.

Energy price crisis is having an impact on banks

Bank of America reacted to the energy price crisis and increased its provisions for credit losses by $264 million due to "higher energy-related charge-offs" and reserve builds for energy loan exposure. More pain may be coming for Bank of America if oil prices continue to slump in Q1-16 and a bankruptcy wave sweeps across the sector.

At the end of the day, Bank of America pulled in $3.01 billion in profits, which was in improvement over last year's $2.74 billion. On a per share basis, the bank reported earnings of $0.28 as compared to $0.25 in Q4-14. Adjusted profits were $0.29/share in Q4-15 and $0.26/share a year ago. Analysts were shooting for adjusted earnings per share of $0.27/share.

Importantly, Bank of America managed to squeeze out a 0.6% book value gain in the last quarter, and a 5.7% gain in the last year. The bank's Q4-15 accounting book value gained a total of $1.22/share Y/Y to $22.54/share at the end of the December quarter.

Bank of America is in the bargain bin

There can be no doubt that Bank of America is in the bargain bin at this point: Book value has again increased in the fourth quarter, but the stock has crashed ~15% in 2016.

Tuesday was no different. Though Bank of America reported satisfying numbers, the bank's shares were down 1.5%. The sell-off has made BAC a 63 cent dollar and it is worth picking up.

Your Takeaway

Investors are have been getting the jitters over oil prices in 2016 so stocks have a difficult standing with investors these days. But from a fundamental valuation point of view, Bank of America has become more attractive as an investment for growth since its discount to accounting book value has widened thanks to a collapsing share price. A ~37% discount to book is bordering on delusional. Buy for capital appreciation.

Disclosure: I am/we are 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.