What To Do With Bank Of America Before And After Its Earnings Report

| About: Bank of (BAC)

The short-term could prove quite different for Bank Of America (NYSE:BAC) shareholders than the medium and long-term. BAC reports earnings per share for its second quarter on Wednesday July 18 before the market open. Judging by the set-up around analysts' estimates for the quarter and what's already happened for J.P. Morgan (NYSE:JPM) and Citigroup (NYSE:C), it seems BAC might get a short-term lift on its report. That said, the medium term environment for the bank should continue to justify the deep discount in the shares' valuation.

Analysts' Expectations:

Yahoo Finance employs the reputable services of Thomson Financial for analysts' estimate information. Based on their survey of 24 analysts, the Street view is detailed here for the company.

Analysts' Estimates

Q2 2012

FY 2012 (Dec.)

Average

0.14

0.57

High

0.23

0.85

Low

0.03

0.31

Click to enlarge

We employ several data points in our effort to best understand operating trends at publicly traded companies. One useful first-look statistic is the consensus EPS estimate trend. Over the course of the last 7 days, the consensus EPS estimate for the company's current quarter has come down by a penny. Over the course of the last 30 days, the consensus EPS estimate for the company's current quarter has dropped by $0.03. Over the course of the last 90 days, the consensus EPS estimate for the company's current quarter has declined 3 cents from $0.17 per share.

Recent EPS History

The recent EPS reporting history of a company may prove relevant in forecasting how it might perform in the current period. However, we think the direction of variance could just as likely be above expectations as it could fall short of expectations. For instance, if a company has fallen short of expectations recently, its next result will depend on the importance of the company's response versus the degree of ongoing damage its operations might bear due to the negative catalyst. BAC's EPS performance is going to be hard to predict this quarter based on its recent history.

EPS Record

June 2011

Sept 2011

Dec 2011

Mar 2011

Actual EPS

-0.90

0.56

0.15

0.03

EPS Estimate

-0.90

0.19

0.15

0.12

Difference

0.00

+0.37

+0.00

-0.09

% Difference

0%

195%

0%

-75%

Click to enlarge

Significant Recent News:

Stock Performance:

Three Month Chart Against SPDR S&P 500 (NYSEARCA:SPY)

Chart forBank of America Corporation

Last 5 Days Against SPDR S&P 500 :

Chart forBank of America Corporation

Our Synopsis:

Bank of America shares have outperformed the S&P 500 over the last several trading sessions, likely reflecting the less than catastrophic report of J.P. Morgan Chase (JPM) on Friday, the solid result of Wells Fargo (NYSE:WFC) Friday and the Wall Street beating result from Citigroup (C) Monday morning. However, these drivers provide little insight into the upcoming EPS of BofA except to say that concerns could be quelled by managed earnings.

The three-month chart shows the company's underperformance against the broader market since its last earnings release. At least a portion of that weakness is due to the trading issue of J.P. Morgan and the Libor fixing scandal of Barclays (NYSE:BCS), which reportedly implicates several other global banks. The market is, however, at ease that the JPM issue may not contaminate other banks, except by the continued regulatory scrutiny of banks it will reassure. The Libor fixing issue is likely to result in a costly settlement for implicated banks, but does not threaten the enterprise, though it does continue as a regulatory cost that some will seek to pass forward to customers.

Another issue working against BAC over the course of the last three-months was Moody's downgrading of its credit rating. The rating agency listed it among a short list at most risk to capital markets activities while noting its exposure to Europe. We covered that issue in our article entitled Why Bank of America Shares are at High Risk. The article spurred a lively debate among shorts and longs in the stock. BofA does have outsized risk in relation to the broader market, evident in the stock's beta coefficient of 2.31 (based on Google Finance) or 1.87 based on Yahoo Finance. Given our expectation of further economic deterioration and market turmoil, BAC is a stock we would mostly avoid over the medium term. The stock, however, has utility value as a daytraders' tool, given its volatility and sensitivity to the market.

Valuation & Recommendation:

The company's recent earnings history paints a picture of inconsistent performance against expectations. By the way, those expectations have been reduced over the last 90 days. The same phenomenon occurred for Citigroup , allowing it to more easily surpass analysts' consensus expectations Monday. The headlines for Citi read that it beat analysts' estimates, but as its adjusted result of $1.00 per share exceeded the consensus view for $0.89, it would not have beaten it when it was $1.03 sixty days prior. Given that BAC's EPS estimate is three cents lower than it was 30 days ago, it might also benefit similarly. The market got smart about Citigroup though, as its early gain diminished by the close Monday. Perhaps there's less opportunity for BAC upside as a result. Company specifics will of course matter though.

Recently, I recommended four banks for a trading gain, tied to the release of the FOMC meeting minutes, and the stocks rose sharply on the day. Bank of America, which was one of the names I favored along with Citi and Morgan Stanley (NYSE:MS), might get lucky again Wednesday if Federal Reserve Bank Chairman Ben Bernanke has anything positive to say when he addresses the House Financial Services Committee Wednesday morning. Bernanke already submitted his semi-annual monetary policy testimony to the Senate Banking panel on Tuesday, setting off a sell-off of shares that was later regained.

Bank of America's price-to-book ratio is 0.39, which is a deeply depressed valuation ratio for a financial institution, and it is low compared to its peers including Goldman Sachs (NYSE:GS), Citigroup , J.P. Morgan Chase and Wells Fargo . Still, the bank has not traded above 1.0 on this account since 2008. It has averaged at about 0.71 over the last five years, and was as high as 1.65 in September 2007. BAC might close ground on this measure if it reports significant improvement in its mortgage operations.

Oftentimes, stocks are deeply depressed for good reason, and a cheap valuation does not necessarily mean the stock will appreciate in value. The term "value trap" was applied by some to Citigroup shares Monday morning, and may apply to BAC. Still, at this value, the stock is likely to gain more on positive news than it is to likely to decline on negative news, depending on severity. So, with its EPS managed lower over the last few months, perhaps it is in position for short-term gain.

The latest economic data, the Retail Sales shortfall for June, will have many in the market looking beyond the company's current report, and instead outward to what seems could be a new recession in the U.S. to complement slowing growth in China and likely recession in Europe. Given BAC's beta coefficient, I think it will not take long for investors to focus on the forward outlook of the bank no matter what it reports Wednesday. For that reason, I would continue to avoid BAC long-term, though it could get a short-term lift from its pending EPS report.

Use this link to access BofA's earnings conference call, which is scheduled for 8:30 AM EDT Wednesday July 18. Use this link to access BofA's EPS release.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.