Bullish investors got the information they were looking for when Bank of America (NYSE:BAC) beat the street with net earnings of $.41 cents a share; hitting my pre-announcement target on the head. The consolidation period from huge rally is nearing completion and in my view the train is about to leave the station with the first stop at $25.
I wrote a piece the day before the conference call sharing my viewpoint that BAC was a buy into earnings and that it might be the last chance to get the stock under $22.50. I wanted to wait a day or two to let things shakeout a little before sharing my opinion on the quarter. So far that mini thesis is working out as planned.
My takeaway from the call
Net income increased 40% to $4.9 billion, and EPS increased 46% to $0.41, compared to $3.5 billion and $0.28. These are some nice numbers for a change; 40% growth is the envy of any company let alone a behemoth like Bank of America. This comes on a day where Goldman Sachs (NYSE:GS) missed earnings on weak trading, hobbling the market in a sell off day.
Share buy back
I advised investors to pay close attention to the share repurchase program and I was not disappointed with the results. The company bought back $2.3B of stock in the quarter lowering their share count to 9.97B shares of common stock. One year ago the bank had 10.31B outstanding shares, that is a whopping 341M shares repurchased in a year. In my view that is a very bullish sign for the company going forward.
Net interest income (NII) increased $453 million, driven by strong deposit growth. Talk on the street is Bank of America has the best upside exposure to a rise in rates.
If you're in the camp of believing that the FED will continue normalization of rates then this is a bullish sign.
I am forecasting one more rate hike this year unless congress passes health care reform on or near the August recess; in which case the market could see two rate increases by year end. Either way one can see that the trend is likely up which will benefit future earnings.
Company firing on all cylinders
Here is a clip from the earnings presentation highlighting the company's positives.
There is no doubt that Bank of America has turned the corner. I like the 70% return to shareholders of Q1 income; it's about time. It is my view that the CEO Brian Moynihan understands that the share price is going much higher and wants to use free cash to repurchase as many shares as possible while they are still at a bargain price.
The business model grew income in most every metric while keeping costs flat. I strongly encourage interested investors to click on the link here and study the earnings data.
The current book value of Bank of America per common share is $24.36 compared to a year ago value of $23.14. Net tangible book value is $17.23 versus a year ago value of $16.19. The important message here is the values are moving in the right direction.
Finding an entry point Post earnings.
Finding that entry point is always a tricky situation, for more clarity and understanding we go to the charts.
Here is a 30 minute intraday chart going back to December.
One might see why I made the call to buy the day before earnings as the stock suffered a steep sell-off designed in my view to create panic for weak handed longs.
To my eye the chart is set up for a rally back to the previous high earlier in the year. Some might say it's in sell-off mode, I say sometimes the charts might look like a break down when it fact it is a fake out to the downside.
Fake-outs and shakeouts happens both ways, That is why I combine charting with fundamentals along with street smarts to try and figure out the shenanigans that Wall Street traders and big money algorithms use to steal shares from people right before the big move to the upside.
I see Bank of America as a very strong buy on any weakness and believe that the train really is leaving the station. When I started writing this article BAC was trading at 22.88. It is my belief that the days to buy this stock sub $23 are numbered.
I believe yesterday's mini shakeout in my opinion was a buying opportunity.
Bank of America had a very solid earnings report, they meet my criteria for a strong buy going forward. Share buybacks will continue to propel the stock higher and keep a floor at my previous level of $21.77 baring a major geo-political event with N. Korea or the like.
I see the potential for the stock to break $30 this year as investors and large funds jump on the bandwagon. Look for the share count to go under 9.2B over the next 12 to 15 months driving book value much higher than it is today.
As always do your own research and make your own decisions. It is important to have an exit strategy in place before making any trade.
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Disclosure: I am/we are long BAC, BP,LYG, CHK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.