Is Bank of America Corp (BAC) Stock Heading to $50?

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Bank of America Corp (NYSE:BAC) is up over 90% over the past 52 weeks; BAC stock is now trading within 2.1% of its five-year high.

Is Bank of America Corp (BAC) Stock Heading to $50?

BAC is on such a big roll that it’s above $25 for the first time since June 2008. To put that in perspective, if you’d invested $10,000 in 2007, despite the stock’s great run since the beginning of 2016, you’d only have half your investment to show for it.

Ouch.

By comparison, if you’d invested CAD$10,000 in the BMO S&P/TSX Equal Weight Banks Index ETF (TSX:ZEB), a Toronto Stock Exchange-listed exchange-traded fund that owns nothing but Canada’s six biggest banks, you would have around CAD$26,000 today.

One U.S. dollar back in October 2009 when the ZEB was launched was worth $1.05 Canadian; today, one U.S. dollar is worth $1.34 Canadian. Therefore, you would have invested $9,700 back in 2009 in U.S. dollars; today, it’s worth $19,500, a 101% return on your investment compared to a 50% loss on BAC.

But that’s water under the bridge.

InvestorPlace contributor Vince Martin believes BAC stock still has plenty in the tank. Does it have enough going for it to get to $50 within the next 12-24 months?

Questions to Consider on BAC Stock

But before we delve into all the good things going on at Bank of America, we first need to go back to June 2008 and consider the valuation investors gave BAC stock in relation to the S&P 500 and its banking peers. That should at least tell us whether the bank’s got a snowball’s chance in hell of doubling its stock price in the next 12-24 months.

According to Morningstar, Bank of America had a price-to-earnings ratio of 25.6 in 2008 and 12.5 in 2007. Let’s assume a two-year average P/E of 19.1; today, its current P/E is 16.8, or 12% less. That’s good news because it means that BAC stock is trading at a discount to its record highs.

As for the S&P 500, its two-year average P/E in 2007/2008 was 13.7; today, it is 21.1, 54% higher.

So, in 2007/2008, BAC had a P/E that was 1.4 times greater than the index. Today, it is 0.8 times the index, which suggests either BAC stock is cheap or the S&P 500 is expensive. By looking at other financial metrics such as P/B and P/S, I’d go with the latter.

Future Outlook for Bank of America

Analysts estimate that BAC will earn $2.09 per share in fiscal 2018. At the March 8 closing price of $25.26, BAC has a forward P/E of 12. If we were to assign a multiple halfway between the S&P 500 at 21.1 times earnings and BACs forward P/E of 12, BAC stock would be valued at $34.76 — a long way from $50.

Not even at a P/E of 20 would it likely get all the way there — at least not in the next 12-24 months.

Therefore, if earnings continue to grow at 10%-20% a year and its multiple expands to 20, BAC would likely hit $50 sometime in 2019. Of course, to do that, earnings have to keep moving higher. Any setback along the way puts that target in serious jeopardy.

We’ve established two things: The S&P 500 is relatively expensive and BAC needs an expansion of its P/E multiple because it doesn’t appear that earnings will grow enough in the next couple of years to do the heavy lifting.

Back to Vince Martin and his argument that BAC stock still has room to run.

He argues that BAC currently trades at a discount to peers Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) both in terms of tangible book value and earnings per share. That too would seem to lend credence to the proposition that at the very least, BAC stock is undervalued.

Martin points out that the Donald Trump regime pushing for less regulation in the financial services sector combined with rising interest rates should do wonders for future BAC earnings. Add to this a balance sheet that’s as strong as it has been since before the financial crisis and you’ve got some serious catalysts to drive its multiple higher.

However, under the scenario above, let’s assume that BAC earnings were able to grow 20% in 2017 and 30% in 2018 while the P/E jumps to 20; that gives us a share price around $48.36 by the end of 2018.

Can BAC stock get to $50 within 12-24 months?

Twelve months? Not a chance. Twenty-four months? I’d say 50/50. By this time in three years? Absolutely, and that’s a darn good return over 36 months.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/bank-of-america-corp-bac-stock-heading/.

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