Bank of America Corp (NYSE:BAC) has become an increasingly attractive stock thanks to cost cuts and valuation, but the quarterly earnings report Monday will steer the course of BAC stock through year-end.
On a fundamental basis, business is improving. Fixed-income trading revenue — long a source of weakness on Wall Street — is improving. Investment banking should be healthier too, now that the stock market has become less volatile to the upside.
Oil prices have stabilized, which helps BAC avoid additional loan-loss provisions tied to the energy sector. And mortgage rates remain low, lifting demand.
It also very much helps that the bank is continuing with aggressive cost cuts. Indeed, this could be a source of underappreciated upside, say some analysts. This is from a from note to clients of Keefe, Bruyette & Woods:
“Recall, BAC management has set an expense target of $53B for 2018, and we have not given BAC full credit in achieving their target in our forward estimates and we forecast noninterest expense to be $53.7B in 2018. Should the company show consistent execution towards the expense goal then we would be more apt to give credit and this would put an upward bias to our forward estimates.”
It’s not all rosy, of course. Net interest margin — the difference between what a bank pays for deposits and charges for loans — continues to get squeezed by ultra-low interest rates. Investment banking fees might improve, but that doesn’t mean they’re thriving. The same goes for equity trading, which has hit a soft patch.
The bottom line is that we could see some sequential improvement in BAC earnings even as year-over-year profitability softens. For its most recent quarter, analysts on average expect Bank of America earnings to come to 33 cents a share, according to a survey by Thomson Reuters. That’s down from 37 cents a share in the same period a year ago.
Another Low Bar for BAC Earnings?
Keep in mind that the Street was modeling earnings per share of 33 cents in the second quarter as well, but actual EPS hit 41 cents. There’s no guarantee that BAC can deliver another Street-beating result of that magnitude. Still, it’s worth remembering that analysts’ expectations have tended to be too low. The firm has exceeded earnings forecasts for five straight quarters now.
BAC still has a lot of work to do before the market starts giving it the benefit of the doubt. However, sentiment is surely improving. Shares might be down over 6% for the year-to-date, but they’re rallied just shy of 17% over the last three months.
Happily for new money, the valuation remains compelling even after those gains. Bank of America still has a price-to-book multiple well below 1.
BAC is making progress with the things it can control — expense reduction — as the economic picture becomes gradually more favorable. The fruits of such realities won’t really be evident on the bottom line until next year. Fiscal 2018 EPS is forecast to rise to $1.54 from $1.28. The Street’s average price target of $17.61 gives implied upside of 13% in the next 12 months or so. That’s a buy in most analysts’ books.
Just remember this: By the time next year’s improvement is confirmed, it will be too late to catch a lot of the upside in BAC stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
