Bank Of America: A Valuation Call, Buying The Pullback

| About: Bank of (BAC)
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Bank of America (NYSE:BAC) is a financial services and multinational banking corporation headquartered in Charlotte, North Carolina. Bank of America is the second largest bank holding company in the US by assets, and serves clients in more than 150 countries. The bank has relationships with 99% of US Fortune 500 companies, and 83% of the Fortune Global 500.

In 2008, Bank of America acquired distressed investment house Merrill Lynch, making Bank of America one of the largest players in wealth management, and investment banking/underwriting. Bank of America shares touched their 2012 highs as word broke that it had passed its Fed mandated stress test, confirming the bank had the adequate capital structure in place to survive a dramatic downturn in the US and global economies, including a double digit drop in housing prices.

Bank of America's stock jumped from the mid $7.80s to the high $9.80s in less than a week upon the passing of its stress test; since then the stock has declined over -35%.

Causes of the Decline

Bank of America shares have been held hostage as of late on both sides of the Atlantic. As Greek and Euro contagion fears engulf the New York Stock Exchange for the second summer, banks of every kind have been selling off with a fury. Greek, Spanish, and Italian bond rates are once again on the rise, and the burning cars in the streets of Athens have only fanned the flames and caused European bank shares, such as Barclays (NYSE:BCS) and Deutsche Bank AG (NYSE:DB), to collapse - down almost -40% from 2012 highs.

On this side of the Atlantic, news broke of the JPMorgan (NYSE:JPM) $2B trading loss, sending US financial stocks plummeting. Since the announcement, trust has been lost in the financial sector, and the JPM loss has grown to 3B or 4B. Through all of this, BAC has been a victim by association - the shares were richly valued at $10, but $6.50 would be a different story.

Earnings Outlook

Bank of America reported a solid Q1, and is looking to earn .69 cents for its 2012 campaign, and $1.05 for 2013. The stock is currently trading at $6.78 / by 1$ earnings = BAC trading at 6.7x '13 earnings. The bank has been cutting costs, cutting employees, taking capital from Warren Buffett, and closing under-performing branches. The BAC that emerges will be leaner, meaner, and more profitable.


If Europe can patch itself together, an immense pressure will be lifted off BAC shares. If JPM can stabilize its losses, investors will soon realize every other bank is not JPM. The US economy is in slow recovery, and the underlying housing market is dramatically better than it was even a few years ago.

BAC will benefit greatly from a US economic recovery, and even Merrill Lynch will soon prove to be a valuable asset or future spin off. BAC and Citigroup (NYSE:C) are often viewed as the riskiest of the US banks, but feature the greatest potential for upside in the near and long term.

BAC shares trading at $6.78 are cheap using every metric, $6.40 per share would be even better. Short-term and long-term the value is compelling. Buy the dips.

Always do your homework, also see BAC SEC filings.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC over the next 72 hours.