Bank of America (BAC) reported adjusted earnings of 31 cents a share Thursday morning, besting the Street's estimate of 11 cents a share by a significant margin. This sounds great on the surface, but there is more to the report than the headline EPS number - and Zerohedge offers one rather dire perspective on Bank of America's earnings report.
Certainly, there is a degree of accounting skill - maybe to a significant degree - that produces the quarterly figures companies report and investors see, and with large banks like Bank of America, we concede that the particular complexity of financial statements and figures should be cause for serious concern among investors. After all, one is wise to invest in what one understands and nothing more.
But, in the case of banks and Bank of America in particular, even those investors unversed in complicated financial jargon can understand a few important concepts foundational to our positive view on banks. For one, it is not difficult to conceive that the U.S. economy as we know it cannot function without only a handful of major financial institutions surviving and, indeed, thriving.
Further, one may with only mild effort extrapolate that our government, like most governments around the world, will exercise enormous power and energy to maintain the livelihood of these institutions, having demonstrated a consistent willingness to do so during the previous 5 years. And, third, the major banks of the United States tend to confront a similar host of challenges - granted, to varying degrees - at any given point in time.
In other words, it is hard (for us, at least) to imagine Wells Fargo (WFC) or JP Morgan (JPM) thriving over the next three years while Bank of America flounders. And we do not see domestic banking in distress for perpetuity.
How To Interpret Bank of America's Earnings
It is helpful to look at Bank of America's earnings in light of recent analysis of its valuation relative to its peers. The same practice can be applied to other banks that have reported, and our article last week, Keep Playing The Bank Rally? Yes, looks closely at the fundamental data pre-earnings across financials. In that appraisal, we concluded that BAC was cheap pre-earnings, and since Bank of America and many of its peers, including JP Morgan, Morgan Stanley (MS), US Bancorp (UBS), Goldman Sachs (GS), and Capital One Financial (COF) have beaten EPS estimates by sizable margins, the post-earnings valuation multiples stand to be even more attractive.
Of course, challenges remain. The much anticipated recovery in the housing market hasn't arrived, and numerous other headwinds persist, notably the debt crisis in Europe. Yet, Bank of America's earnings demonstrate progress, improving credit, the significant profit potential that exists in its trading and wealth management divisions when given a decent market environment within which to operate (we predicted strong results there in the article How High Can Bank Of America Go?), and a stemming of losses. Also worth noting is the potential for outsized earnings once housing finally does recover.
Bank of America Bottom Line
This latest earnings report and beat will put Bank of America even further in the value bargain bin - with lowered multiples and an improved credit condition. The quarter wasn't perfect, but it saw progress and should be good enough to sustain the stock's rally.