Here’s Why Bank of America Corp (BAC) Stock Will Gain 25%

BAC stock - Here’s Why Bank of America Corp (BAC) Stock Will Gain 25%

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It’s hard to imagine that a stock like Bank of America Corp (NYSE:BAC), which has risen some 36% over the past three months and 68% in twelve months could be undervalued. But when compared to its peers like JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), BAC stock, which can drive to $30 per share, looks like the equity to bank on in the financial sector.

Here's Why Bank of America Corp (BAC) Stock Will Gain 25%

Source: Shutterstock

BAC stock closed Friday at $22.64, rising 0.49%. The shares have risen 4% year to date, besting the 1.6% rise in the S&P 500 Index.

The Charlotte, NC-based bank just reported a 47% surge in fourth-quarter profits, fueled by a combination of factors, including strong trading activity since November’s presidential election. The bank’s 40-cent per share profit not only beat consensus estimates by 2 cents, it marked 48% jump year-over-year.

Bank of America CEO Brian Moynihan, who has focused on cutting the bank’s operating expenses, has turned BofA into a growth machine. And with financials in general beginning to see a “change in the cycle,” as Goldman Sachs CEO Lloyd Blankfein proclaimed, referring to higher interest rates and the scaling back of Dodd-Frank, banks are poised to deliver higher revenues and profits in the quarters ahead.

In the case of Bank of America and BAC stock, it has the best of both worlds. During the fourth quarter, Bank of America’s non-interest expense of $4.3 billion declined 6.5% from $4.6 billion a year ago. All told, for all of 2016, BofA recorded a 15% rise in earnings per share, which is an extremely strong number given the various legacy legal issues it has had to contend with related to the mortgage settlements. Much of the gains were driven by the 5% decline in total expenses to $55 billion.

Better still, BofA wrote off only 0.39% of its portfolio in 2016, compared to 0.52% in the fourth quarter of 2015. This underscored the degree to which Moynihan has improved the bank’s risk profile.

At the same time, the No. 2 U.S. bank by assets reported fourth-quarter revenue of $20 billion. Of that total, the bank’s trading revenue grew 11% to $2.8 billion, while brokerage assets increased 18%. In terms of “normal banking,” Bank of America’s balances available for lending grew by $64 billion, or 5.3%, to $1.261 trillion, including $28 billion coming in the fourth quarter alone.

Bottom Line on BAC Stock

Given BAC’s working strategy of cutting costs, while growing revenue on the back of higher interest rates, the bank’s profitability should steadily rise in 2017, which bodes well for BAC stock, which is priced at a forward price-earnings ratio of just 11, compared to 11.3 for JPMorgan and 12 for Wells Fargo.

When applying a 13 multiple to BAC stock, which is deserved given its improvements, the shares should reach $28 in the next 12 to 18 months, delivering 25% returns.

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

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