I wrote an article back in November of last year to first suggest that investors take a look at Bank of America (BAC). Basically, I suggested that it could be a buy back then because it was so beaten down for several years, and so very undervalued based on the fundamentals, that it could be a significant stock to own for capital appreciation.
I followed it with this article in which I finally bought shares myself at $5.17/share. I suggest you take a look at that article as well for some further background. Of course I got slammed and blasted by loads of folks for that article also.
I am now re-iterating my opinion that Bank of America is a buy for the long term investor. I believe that it is still quite undervalued based on the fundamentals, and given that the earnings report is due out the first thing tomorrow, we might see a short term pop in the stock as well.
Bank of America : Price: $7.92/share, Dividend Yield: 0.5%, ESS Rating: Neutral (but almost bullish)
Lets do some direct bullet points:
- The market cap is roughly half of the enterprise value
- The share price to book value is at an insanely low .39
- Revenues are nearly $80 billion
- Total cash is about $640 billion
- Operating cash flow is about $50 billion
- The actual book value right now is nearly $20.00/share
I realize these are basic fundamentals, but sometimes it's a really good idea to clear our heads when discussing a stock that has been so hated for so long. Actually, being hated is perhaps a big reason the stock is trading so much below book value.
For our purposes (to make money) the idea is to buy something when it's cheap and everyone hates it. Well, not everyone hates BAC anymore, but enough people still do.
This Wall Street Journal article states some rather important issues that should be considered right now, as we wait for BAC's earnings:
Actual analyst estimates: According to Thomson Reuters, analysts expect earnings of 14 cents a share on revenue of $22.9 billion.
I believe Bank of America will beat earnings based on a much cleaner balance sheet and all of the efforts made to repair the mortgage mess.
Lending - Deal Journal says it time and again, the big banks are going to need lending to return to steady profits. Maybe none more so than Bank of America. But BofA has been lagging other banks in loan growth as it focused on its balance sheet. Last quarter total loans fell 3%. Mortgage originations have fallen off a cliff over the past year. Commercial loans did show some bright spots, but other banks have flashed large gains. Another lagging quarter may start to nag for some BofA investors.
Let's be candid here. Aside from Wells Fargo (WFC), banks are just not lending. First, a loan applicant must be pristine, and second, the have to not need the money. Sounds familiar, right? That's the way lending was back when the world was sane.
Another point to be made is that the risk/reward on lending is ludicrous. Why should banks lend at such low interest rates when they can make money on fees? The answer is obviously that they are making their money elsewhere other than lending. I will disagree with the WSJ article in the respect that Bank of America will be far less scrutinized for a lack of lending than they would if they were not making money, and they are making money.
Capital - Whether or not anyone asks or not, BofA is likely to talk a lot about its capital position, as it has in several previous quarters too. Chief Executive Brian Moynihan has made reshaping the balance sheet and strengthening capital his crusade, and the bank is going to continue highlighting what he believes is the biggest change from a year ago. Recall that it was late last summer when the bank's shares plunged below $5 on fears a share sale would be needed. Each quarter, Moynihan has looked to put another nail in the coffin of that concern, even as shares remain below $8.
Well, this is correct. Bank of America has come a long way from needing money and having a lousy balance sheet. Hate Moynihan all you want, he has delivered on what he has promised, and BAC is positioned to surge higher.
Lower costs, more revenue, a better balance sheet with plenty of cash. When interest rates move higher to give some rewards to the lending risks, just think how pretty those revenues and profits will look on a clean balance sheet.
Finally, the article notes:
Cost cutting measures - The second phase of "New BAC," the bank's boringly named cost-cutting plan, has not yet produced a formal target. Analysts have been anxious for a number, and cost-cutting in general has been a topic at several other banks so far this quarter, including Goldman Sachs Wednesday. The topic is likely to come up at BofA tomorrow.
This topic will absolutely come up. Why not? they have taken steps to reduce all costs, and if they have succeeded as much as a pinch of what I anticipate, the stock will be worth even more.
Back in February I wrote this article stating that i was no longer keeping Bank of America in my risk portfolio. The stock was placed in our "Team Alpha" core portfolio, as well as my own.
I believe that owning shares of Bank of America at the current share price will offer any investor an outstanding capital appreciation opportunity. This earnings report could be the tipping point.
Disclosure: I am long BAC.