Bank of America: BAC Still a Great Cheap Stock After Earnings

Part of the bull case on Bank of America Corp (BAC) is its sensitivity to an improving U.S. economy.

Bank of America Corp (BAC): Wall Street Cheers a Mixed Quarter

Well, that certainly helped in an otherwise mixed earnings report out this Thursday.

Bank of America’s profit per share matched Wall Street’s average estimate, but revenue came in light. As expected, the bank had to set aside more cash to cover souring loans in the oil patch and higher-margin segments like trading were about as bad as feared.

And yet BAC stock was up around 3% in noon trading.

The market was surely cheered by bigger-than-expected cost cuts — and BAC’s pledge to find more — but patient investors should latch on to something even better.

BAC’s consumer banking unit — by far its biggest unit — saw revenue rise 4% thanks to higher deposits and more loans. The boring old business of straight-up banking is doing just fine. That speaks well of the economy and BAC’s exposure to it.

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Besides, even the bad parts of the report weren’t really all that bad. It was well known that Wall Street had a poor first quarter.

The first three months of the year are usually seasonally strong, but not this year. Global growth is weak. Worries about China, a surprise rate cut in Japan, negative rates in Europe and uncertainty over Federal Reserve policy at home have made markets choppy. Capital markets, equity markets, currencies, initial public offerings are hurting results.

Analysts were well aware of this fact.

BAC Stock Is Too Beaten Down

Both JPMorgan Chase & Co. (JPM) and Wells Fargo & Co (WFC) already beat Street estimates. BAC followed it up with earnings that came to 21 cents a share, matching the forecast compiled by Thomson Reuters.

Revenue missed estimates, coming in at $19.57 billon vs. the $20.3 billion projection, but that was driven by the expected weakness in trading and energy-sector loans.

It’s not good, but neither is it a complete surprise. The bad news was largely priced in.

That’s why progress in cost cuts and consumer banking is such positive news. The market always loves expense reduction, and it serves as a near-term catalyst for Bank of America stock. Meanwhile, progress in consumer banking reveals the effects of low unemployment and wage growth. A resurgent U.S. economy is a long-term tailwind for BAC stock.

Banks are unpopular these days, and things will probably stay that way for a while. The energy sector is costing them an uncertain amount of money, and the market hates uncertainty. Interest rate policy is likewise uncertain. Neither of these conditions look like they’ll abate anytime soon.

But BAC stock looks overly cheap even after including all these concerns. The price-to-book value is 0.61. That’s the lowest level among the four big bank stocks. Sure, that could be because Bank of America is in trouble, but we’ve seen no evidence of that.

Shares in BofA will probably take a long time to get any sort of multiple expansion. The whole industry is under pressure.

But if you’re looking for a cheap bank stock, BAC is one of them.

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