What BAC Owners Need to Know Before Wednesday’s Earnings Report

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Will 2015 finally be the year Bank of America (BAC) shrugs off the last of its lingering problems from 2008 and starts to post some meaningful — and consistent — earnings growth?

What BAC Owners Need to Know Before Wednesday's Earnings ReportThat ultimately remains to be seen. The Bank of America earnings report due Wednesday morning, however, will at least partially answer the question.

Analysts are collectively looking for bigger and better results from the company. And yet, these same analysts have downgraded BAC stock three times since February to neutral or sub-neutral opinions, suggesting the best-case scenario may already be priced into the value of BAC.

However, in the midst of that contradiction, would-be investors may find an opportunity with BAC stock.

Bank of America Earnings Expectations

The past five quarters haven’t been good ones for Bank of America — the company missed earnings estimates in four of those five quarters. True, legal costs and settlements costs were the core reason for the shortcomings (much of those costs were incurred by the Department of Justice’s probe of the way BAC improperly created and marketed mortgage-backed securities). But that’s of little solace to anyone who owned BAC stock during that time.

However, it looks like the bank’s legal woes are behind it. In turn, it looks like the bulk of its fiscal woes are also behind BAC. The pros are finally seeing “normal” revenue and earnings growth in the cards for BAC stock that mirror the results being achieved by peers like Wells Fargo (WFC) and Citigroup (C).

As of the latest look, Bank of America is expected to post earnings of 36 cents per share on $21.3 billion worth of revenue for its second quarter of 2015. That’s 90% better than the 19 cents per share it earned in the same quarter a year earlier, though the top line is expected to slide 3% lower from the second quarter of 2014’s tally of $21.96 billion.

The earnings figures would mean much more had the bank not been forced to digest a bevy of legal expenses and write-downs over the course of 2014. As was noted, however, the past isn’t an indication of the bank’s true health. This year’s and next year’s figures paint a much more relevant picture.

To that end, the Bank of America earnings per share total is projected to reach $1.34 per share of BAC stock this year, and rise to $1.59 per share BAC next year. That translates into a palatable forward-looking P/E of 10.7.

Three Things for Owners of BAC Stock to Chew On

Of course, the estimates are just numbers. The bank will need to make forward progress, free of any more legal and accounting headaches, to reach those lofty targets.

With that as the backdrop, three themes are apt to determine how will BAC ultimately performs from here.

  1. Giving credit where it’s due, it was The Motley Fool’s John Maxfield who pointed out Bank of America could save nearly $2 billion per year if it could simply bump up its credit rating by one notch. Currently rated at Baa1, Bank of America is currently paying interest of 2.2% on its long-term debt, whereas peer Wells Fargo is only paying 1.3% on its long-term obligations. That extra $2 billion could go far for a company of BAC’s size and typical net income.
  2. Though it didn’t “fail” the most recent round of stress tests performed by the Federal Reserve, Bank of America and its investors were told in March it would still struggle too much in the wake of a financial crisis — changes were necessary. Merited or not, that’s a dark cloud that will hang over BAC stock until it actually passes the Fed’s test with flying colors.
  3. Last but not least, while there’s plenty of fundamental context to trade BAC on, there’s no denying the stock itself has become something of a shell game requiring investors not to guess corporate results, but rather guess how the market (including analysts) are going to feel about it in the foreseeable future. Bank of America shares are right back where they were in March of 2014, with the pros fairly close to neutral on it overall. It has all the makings of a big move, one way or another, with just the right nudge.

These three items may or may not come up during Wednesday’s conference call. Either way, they should be weighed carefully by current and prospective owners of BAC stock.

Bottom Line for BAC

While investors have been fooled by BAC stock before, at this point it really does look like the bank’s darkest days are behind it.

The earnings outlooks are still a bit aggressive, and Wall Street remains less than enthused. Potential earnings misses from here along with subsequent downgrades could weigh BAC stock down … at least in the near term.

In the long run, though, rising earnings (regardless of estimates) and a low valuation make BAC a “buy on the dip” proposition provided there’s ample evidence the company is finally moving forward.

Bank of America earnings figures and accompanying commentary to be released on Wednesday will be the first really good glimpse of what’s to come.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/bac-stock-earnings-report/.

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