Ever since Bank Of America (BAC) dropped to multi-year lows around $5, the stock has taken more time to climb through each resistance level. This time as well, the company's stock price seems to have got stuck around $8, which is its strong resistance level. Once the stock crosses $8.20, the next stop will be well above $9 (next resistance starts at $9.50).
Let us evaluate some reasons why the stock should be moving upward in the next month.
Looking back into the previous three years, BAC has reported 2 positive, 1 negative, and 1 inline earnings surprises.
The 2Q 2012 earnings call on 07/18/12 was a positive EPS surprise of more than 30% above the Wall Street consensus. The company reported 2Q 2012 net income of $2.5 billion and EPS of $0.19 (consensus was $0.14).
Positives coming out of the second quarter results are:
- The company's long term debt reduced by $53 billion and the balance sheet became stronger, thanks to both maturities as well as the company's assertive liability management actions.
- Capital ratios showed good improvement as well. The Tier 1 common capital increased by $2.5 billion, ending the quarter at 11.24% under Basel 1. The company said it expects the Basel 3 Tier 1 common equity to be 8.1% on June end - on track so far with their 7.5%+ target for 2012.
Regarding this, the company quoted during the earnings call:
"So based on where we came out at the end of quarter, we're quite pleased with the progress we've made so far".
- The improvement in delinquencies and more importantly, the credit quality was faster than the analysts expected.
- Expenses were less than expected and appear to be in control. Expenses declined 11% q/q. Such expense reductions should continue for the next two years, as the company completes its Phase 2 of the New BAC project.
The CFO had stated during the earnings call that the company is targeting to produce annualized cost savings of approximately $8 billion by mid-2015, thanks to combined efforts of both Phase 1 and Phase 2.
- The company is working hard to be become leaner since past many quarters. It has announced closure of many branches and even job cuts. This in my opinion is a smart move that will help the company achieve better operating efficiency and reduced expenses in the next many years.
- The impact of interchange related regulations on the company's debit card revenue was not as bad as the market had expected.
EPS Estimates Positive For Next Two Years
Take a look at the EPS estimates for Bank Of America.
The 2011 annual EPS is the actual number, while the 2012-2014 numbers are the most recently revised estimates.
The quarterly EPS estimates for the next four quarters trends upward as well, with estimates for 3Q 2012 at $0.14, 4Q 2012 at $0.19, 1Q 2013 at $0.21 and 2Q 2013 at $0.24.
Bullish Options Activity
On 08/31/2012, more than 50,000 calls with $9 strike price and October 2012 expiration were purchased, indicating that many traders are expecting a short term rally in the stock price.
Bullish Technical Indicators
There are several positive technical indicators for this stock.
- The slope for 10 day, 20 day, 50 day and 200 day Moving Averages are all up.
- The On Balance volume indicator is positive and shows that there is lot of buying interest.
- The Up-Down volume also indicates that the stock is under accumulation rather than distribution.
- The company's stock has a high institutional holding (54%), and usually when market sentiments or a stock's technicals turn positive, institutional trading make a bigger impact because greater levels of accumulations occur. This tends to raise the stock price significantly higher in a relatively shorter period.
With 2Q 2012 results, the company seems to be on the right track.
If the stock pushes above $9 as suggested by the recent Option activity, the appreciation should continue to the $9.50-$9.90 range, which is the stock's next resistance level. This is appreciation of 18%-24% from its current $8.00 stock price, before the end of 2012.
Looking at the earnings estimates for next two years, BAC could appreciate to $12-$14 during this same period, and the price appreciation should have more momentum if there are any positive surprises.
BAC trades with a high beta of around 2. As with any other investment, there are several risks associated with BAC.
- Risks related to regulations continue to linger for the entire sector and will not spare Bank Of America.
- Investors should keep watch on whether the company stays on track for its expense reduction and capital ratio targets.
- A slower recovery in the housing and overall economy will adversely impact the stock price.
- Risks associated to lawsuits and similar contingent liabilities could impact the company's profitability.