Bank Of America: The Thesis Remains Intact

Summary

• Bank Of America reported strong Q4 2018 results that beat top- and bottom-line estimates. Additionally, the bank's results for full-year 2018 were significantly better than for the prior fiscal year.
• I believe that the investment thesis for Bank Of America is not only still intact, but that it has actually gotten stronger over the last four quarters.
• Bank Of America is my largest holding and I plan to stay long the stock.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

Bank of America (NYSE:BAC) reported Q4 2018 results that were well-received by the market, as shown by the fact that the stock finished the trading day ~7% higher. BAC shares are now higher by approximately 20% so far in 2019, but the stock is still underperforming the broader market by 2 percentage points over the last year.

BAC data by YCharts

BAC's impressive stock performance over the first few weeks of 2019 has been nice and all, but in my opinion the stock is still a great long-term buy at today's price. Why? It's simple: Bank Of America has a promising long-term story to tell and it helps that this bank's recent results support the investment thesis for this large financial institution.

The Thesis Remains Intact

BAC was consistently viewed as the "problem child" after the Financial Crisis, and rightfully so, as the bank shelled out billions and billions of dollars in legal fines and settlements. To this point, the trending of BAC's net income over the last 15 years says a lot about how impactful the crisis was to this bank (and its shareholders) - notice the rise, the fall, and the rise again.

BAC Net Income (Annual) data by YCharts

Also, notice that BAC's current net income just recently passed pre-crisis levels, which, in my mind, is meaningful. Mr. Brian Moynihan, CEO, and team have finally righted the ship and, in my opinion, BAC is in the greatest position that it has been in the last 2 decades.

The thesis is simple: BAC's stock has been pulled down by broader market concerns but the bank has several key businesses that have great long-term prospects. Moreover, the bank is properly position to benefit from several major trends - i.e., rising rates, growth in digital operations/processes (lower expense base), and an improving regulatory environment (not as encouraging as it was a few quarters ago but definitely better than the last five plus years) - that should help propel the stock price higher. Lastly, let's not forget that BAC shares are still attractively valued, even after the recent run-up, and the bank has a legitimate capital return story to tell.

It also helps that the bank's recent operating results show that the investment thesis remains intact.

The Latest. BAC's Recent Results Were Noteworthy To Say The Least

On January 16, 2019, BAC reported Q4 2018 results that beat the top- and bottom-line estimates. The bank reported adjusted EPS of $0.70 (beat by $0.07) on revenue of $22.7B (beat by $390M), which also compares favorably to the year-ago quarter.

Source: Q4 and Full-year 2018 Earnings Presentation

There are plenty of pundits chalking up BAC's impressive results as simply a result of the tax reform bill but, as shown, this bank reported strong results almost across the board even after excluding the "one-time benefit".

The following were some of the highlights for the quarter:

• Operating leverage increased 7% YoY,
• Diluted EPS were up 49% YoY (excluding tax impact) on record quarterly net income of $7.3B,
• Average loans & leases and average deposits grew by 3% and 4%, respectively;
• Return metrics and the efficiency ratio were significant improvements from the year-ago period.

It is a significant understatement to say that BAC finished 2018 with a bang so there is no wonder that the stock finished the trading day up ~7% after reporting these strong results. Plus, when taking a step back, it is important to remember that BAC also reported significantly better results in full-year 2018 than it did in the prior fiscal year.

Source: Q4 and Full-year 2018 Earnings Presentation

Observations:

• Total revenue was up 4% and noninterest expenses declined by 2%, which resulted in strong operating leverage growth,
• Net income was up 54% but diluted earnings per share grew by 67% (buybacks are coming into play in a major way),
• All return metrics and the efficiency ratio improved YoY;
• Management returned ~$25.5B in capital to shareholders in the form of dividends ($5.4B) and buybacks ($20.1B).

What's not to like about these YoY comparisons? It is hard to deny that this was a blowout year for this large financial institution. And more importantly, the bank's CEO, Mr. Brian Moynihan, was recently interview by CNBC and stated that he believes that the U.S. consumer is in a great position entering 2019 and that BAC's business prospects appear promising, even after factoring in the global growth concerns. This supports the thought that BAC is well-positioned for the next few quarters and, if you ask me, BAC's stock will likely be a market beater over the next 12-18 months.

Valuation

Even after the recent run-up, BAC shares are still attractively valued when compared to its peers.

Data by YCharts

BAC does not deserve a valuation in line with the likes of JPMorgan (JPM), at least yet, but I believe that BAC is heading in that direction. To me, BAC should at least be trading closer to the 1.8x TBv range, which means that the stock should be closer to $32 per share (and that is being conservative given the company's capital return story).

From a capital return standpoint, I believe that this chart says it all:

Source: Q4 and Full-year 2018 Earnings Presentation

Moreover, the company is well-capitalized so investors should expect more of the same over the next two plus years.

Risks

Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes BAC. I believe that the regulatory environment is actually improving, but this could change in short order.

From a macro standpoint, a deteriorating economy would eventually negatively impact the banking sector. Currently, there are some headwinds, but in my opinion, a recession is not in the cards in the near future.

Bottom Line

I have said this over-and-over again (check my Seeking Alpha profile), but I believe that BAC shareholders should just stay the course. This bank is well-positioned for 2019 and beyond and, in my mind, Mr. Moynihan does get the credit that he deserves. This CEO navigated BAC through its post-crisis years in an orderly fashion and created a bank that has promising business long-term business prospects. And the Q4 and Full-year 2018 results prove it.

I believe that BAC stock will be a market beater over the next 18-24 months so investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.

Author's Note: Bank Of America is my largest holding in the R.I.P. Portfolio and I have no plans to reduce my position in the near future.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long BAC, C. 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.