Bank of America Corporation (BAC) is committed to returning value to shareholders, while divesting assets in order to focus on core functions. In conjunction, its primary initiatives are to reduce operating costs, strengthen the balance sheet, and focus on long-term growth investments with minimal risk, while lowering its level of debt.
While Wells Fargo (WFC) is regarded as the safest and most favorable asset in the banking industry, I believe Bank of America offers investors and shareholders the most potential for capital appreciation once it rebounds. Bank of America currently trades between 20 percent and 25 percent of the price of most of its peers in the industry. Bank of America is also an investment of limited risk in comparison to competitors like Citigroup (C) or JPMorgan (JPM).
Below, I will discuss why I believe current shareholders should hold Bank of America for the long term, while interested investors should buy in now as Bank of America is trading at attractive price levels.
Bank of America's beta is around 2.3, while its PEG ratio is slightly over two. Bank of America's current price is over 13 times earnings. Its sales growth has decreased by over 10 percent from the previous year and by over 9 percent since the previous quarter. Bank of America's price to book ratio is less than 0.5 and its price to sales ratio is less than one. However, its price to cash flow ratio is over 15. Its current ratio is slightly over one, while its quick ratio is slightly less than one; both have decreased by around 1 percent from Q4 2011 through the end of Q1 2012.
Bank of America's return on equity and operating margin went from a deficit in Q4 2011 to slightly over zero by the end of Q1 2012. By contrast, its net margin decreased from slightly less than zero in Q4 2011 to a deficit of over 2.3 percent by the end of Q1 2012. Bank of America did decrease its debt to equity ratio by more than 5 percent from Q4 2011 through the end of Q1 2012 to around 1.66. Bank of America is still providing a dividend yield of around 0.52 percent, this equates to around $.04 annually. Its dividend yield is around 70 percent less than the industry average.
Bank of America's price to book ratio for the most recent quarter is less than half of the industry average, while its price to cash flow ratio for the most recent year is almost 60 percent higher than the industry average. Bank of America's net profit margin for the trailing 12 months is around .05 percent, while its return on equity for the same time period is around .01 percent.
Bank of America's growth rate for the last five years has been almost 20 times worse than the industry average. However, its growth rate is over 25 times more than the industry average for this year. Its projected growth rate for next year is more than four times the industry average. Its projected growth rate for the next five years levels out to around 70 percent of the industry average.
According to the financials, it's clear to see Bank of America is currently running at a discount on the market,while it remains determined to maintain a dividend for shareholders. It is still far from recovering its margins and level of debt but a positive turnaround is on the horizon in the long-term.
The LIBOR related law suits and investigations underway will mostly continue to contribute to dips in the stock prices of several large banking institutions. The CEO of Barclays (BCS) has already been ousted. Both Barclays and UBS (UBS) have already admitted to "foul" play. The ongoing investigations have the potential to impact JPMorgan, Citigroup and possibly Bank of America as well. Even if some of the investigated banks in the U.S and abroad are exonerated, the developing news and poor publicity will continue to weigh on stock prices industry-wide. However, this does create an opportunity for investors to buy into Bank of America at a further discount; shareholders need to hold long term and weather the storm. There are a number of class-action and RICO lawsuits developing so it will take some time for the facts and outcomes bear out.
Beyond this looming litigation fiasco, Bank of America is making conservative and fundamental decisions in order to improve its balance sheet. Aggressively reducing operating costs is currently the main objective. From Q1 2011 to Q1 2012, Bank of America cut around 19,000 employees from the payroll. It also reduced its exposure in the legacy investments that contributed to the financial crisis by around 40 percent. Bank of America has been able to increase its total number of mobile banking customers by 39 percent and new credit card accounts by 19 percent.
Bank of America's Merrill Lynch division was recently rated second worldwide in net investment banking fees for Q1 2012. The "New BAC" initiative has management focused on a plan of being customer-driven, strengthening its balance sheet, effectively managing risk, improving efficiency and returning value to shareholders. In conjunction with the last initiative, Bank of America recently announced the redemption of nearly $4 billion in TruPs for shareholders.
Bank of America has been making promising investments to foster growth in capital appreciation and for divergent third parties as well. It's currently the largest lender to the commodities sector, dolling out almost $15 billion in investments. This amount exceeds the next two largest investors, its competitors, JPMorgan and Citigroup. JPMorgan's $2 billion investment blunder is reportedly potentially approaching $9 billion as more facts emerge. Citigroup stands to lose nearly $5 billion in book value as it struggles with declining exchange rates due to its expansive global portfolio. Bank of America has also pulled off of mortgage lending as Well Fargo attempts to approach 40 percent market share.
Bank of America currently services one out of every two households. It has over $66 billion in commercial non-real estate loans and over $8 billion in commercial real estate loans. Bank of America has also invested over $40 million in green energy and power financing and over $5 billion in green commercial real estate debt and equity transactions.
Bank of America has also recently hired over 30 small business bankers to help support the vital small business sector in the state of Washington. Small businesses consist of over 97 percent of the employers in the state and employ more than 50 percent of the private labor force. This represents a 6 percent increase in these investments from 2011. Bank of America plans to hire over 1,000 small business bankers throughout the country.
Bank of America is making a number of promising and reliable investments, while attempting to become a more lean and focused banking entity. Shareholders should hold for the long term, while interested investors should buy now for the near maximum potential of capital appreciation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.