Bank of America Corp (BAC) bolstered the bull case for BAC stock on Tuesday when it reported better-than-expected earnings, revenue growth across almost all business lines and additional cost cuts.
Indeed, the quarterly report should give shareholders confidence that BAC stock will be an outperformer once the current correction runs its course.
After all, anxiety over the crash in oil prices and Chinese economy are rattling global markets, but they’re not all that important to Bank of America or BAC stock.
For one thing, like the broader banking industry, Bank of America’s exposure to bad energy loans is too small to be a killer. Analysts at Barclays figure that oil and gas accounts for just 2.5% of BAC’s total loans outstanding.
As for oil, prices aren’t crashing because of a sudden slowdown in global demand. It’s due to an overabundance of supply. OPEC is at record production levels, U.S. output is at a 40-year high, and Iran is about to reenter the global market.
Bank of America, however, is primarily a play on the domestic economy, which — believe it or not — is actually doing OK.
No, there are no fireworks, and we’re seeing too little inflation, but the U.S. economy is chugging along steadily, if modestly.
The labor market is essentially at full employment, and wages are at long last expanding. By a number of measures, the housing market is back to pre-crisis levels, and consumer spending — while hardly impressive — is trending up.
BAC Stock Earnings Haven’t Looked This Good in Years
Take a look at BAC’s earnings and you can see the benefits of these economic improvements.
For the most recent quarter, profits came to $3.01 billion, or 28 cents per share, up from $2.74 billion, or 25 cents per share in the same period last year. Low expectations helped Bank of America earnings surpass analysts’ average estimate by 2 cents per share, according to a survey by Thomson Reuters.
Total revenue ticked up 4.3% to $19.56 billion from a year earlier. That was short of the Street view for $19.81 billion, but like many stocks in recent earnings seasons, BAC got a pass on the top-line miss.
In BAC’s case, that’s because of the underlying improvements across most business segments — especially in the mainstays of commercial banking, retail banking and wealth management. As CEO Brian Moynihan said in a press release:
“We saw solid customer activity in loan growth, deposits, and wealth management asset flows, and we returned more capital to our shareholders.”
Even an industry-wide weak spot turned into a strength in the latest quarter. Most players are struggling with sluggish bond trading, but BAC enjoyed a 20% gain in fixed income trading revenue.
Additionally, Bank of America cut costs by 2%.
When the market tide finally turns, BAC stock should get multiple expansion based on its much-improved prospects. Improvements in the domestic economy are helping the top and bottom lines. Meanwhile, the rate-hike cycle — after some time — will give it relief from compressed net interest margins.
If you’re looking for big bank stocks trading at bargain levels these days, BAC stock has got to be a top pick.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
