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Bank of America Corp (BAC) Stock Is STILL Too Cheap to Ignore

It took a while, but investors finally have come around to Bank of America Corp (NYSE:BAC) stock. Shares unsurprisingly plunged during the financial crisis, due in large part to the company’s disastrous purchase of mortgage lender Countrywide Financial. That deal has not only cost BofA over $50 billion so far, but eroded investor trust in BAC stock.

Bank of America Corp (BAC) Stock Is STILL Too Cheap to Ignore

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While Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), and even Wells Fargo & Co (NYSE:WFC) all trade above their levels from a decade ago, BofA is still down over 50% from where it traded a decade ago.

That decline exists even though BAC stock has doubled in less than a year. And it shows how much more upside the company could have going forward. Even with Bank of America at an eight-year high around $23 per share, the stock looks inexpensive. BAC stock trades at just 15x 2016 earnings-per-share. Yet an improving economy and higher interest rates both imply higher EPS in 2017. Even after doubling, Bank of America looks like it should have more upside.

BofA Had A Strong 2016

BAC’s fourth-quarter report earlier this month didn’t draw a lot of attention, to be sure. ‘Core’ EPS of $0.37 actually missed consensus estimates by a penny. But looking at 2016 as a whole, the performance looks far more impressive. Full-year EPS of $1.50 was up 15% year-over-year, with revenue up just 1% year-over-year.

BofA CEO Brian Moynihan pointed out on the company’s Q4 conference call that the bank has cut expenses for 20 straight quarters, which has improved both earnings and return on equity. Bank of America has dramatically lowered its risk profile as well. Net charge-offs of debt are at historic lows, falling from 0.52% at the end of 2015 to just 0.39% at the end of 2016.

There simply was a lot of improvement across the board. Not only did earnings rise, but BAC stock’s book value increased nearly 7%. Tangible book value rose 8.5%. The total deposit base was up 5% year-over-year; BofA’s consumer deposits rose nearly 10% year-over-year, as the company took market share from other banks. (One would think that Wells Fargo, given its recent negative headlines, would be one of the losing competitors.)

All four operating segments posted year-over-year gains. And that came even with the low interest rates in the U.S. and the shock of the Brexit overseas. All told, 2016 was a fine year for Bank of America — and yet, 2017 looks like it should be even better.

Why Bank of America Should Have A Better 2017

As good as 2016 was, 2017 should show continued improvement, as there are a number of trends that should benefit BAC stock. The most obvious is the potential for interest rate increases. CFO Paul Donofrio said on BofA’s Q4 call that a 100 bps increase in interest rates would provide an additional $3.4 billion in net interest income to Bank of America: a $0.20 to $0.25 benefit to BAC stock’s EPS.

BofA still should have room to take market share in deposits, particularly with Wells Fargo and Citigroup Inc (NYSE:C) struggling in that area. The expense cuts aren’t over, with BofA citing a target of $53 billion in expenses, providing another $5 billion or so in savings — and another $0.30 in EPS.

Meanwhile, the election of Donald Trump adds further potential help for BAC stock. To be sure, financials, including Bank of America, already have gained sharply since the election. Investors are clearly anticipating lower regulation, and perhaps an end to the steady announcements of fines and regulatory actions.

Those fines have taken billions of dollars from the shareholders of not only BofA, but JP Morgan Chase, Citi and numerous consumer and investment banks. It’s likely penalties would have eased anyway, with most of the legal issues from the housing crisis now resolved, but there’s certainly a sense that Bank of America and its peers can finally get back to some sort of normal business. In that scenario, BofA’s current share gains seem to position it well in 2017 and beyond.

Add to that the fact that demand from both consumers and businesses seems to have spiked in Q4, according to Moynihan, and BAC stock looks like it has room for further upside.

Bottom Line on BAC Stock

Despite the strong 2016, and potential earnings help in 2017, Bank of America stock trades at just 15x 2016 earnings, and just 13 to 14x 2017 EPS estimates. That’s a multiple largely in line with its peers, which trade in the 12 to 13x range. However, BAC looks like a far stronger play. It’s getting more consumer business than Citi or Wells Fargo; it has more fat to cut in terms of expenses and its growth seems likely to be stronger than the other large financials for at least the next two years.

Rising rates and further cost cuts alone seem likely to get Bank of America earnings over $2 per share. With a bit of economic help, a still-cheap 13 to 14x multiple would value BAC stock over $30. And there’s still potential upside from a higher multiple, as investors become more comfortable with the lower-risk business going forward, and from increased dividends and/or share repurchases as regulators allow BofA to return more capital to shareholders.

All told, BAC stock looks like the best pick in the financial space. Even rivals seem to agree. Goldman Sachs analysts have Bank of America on its “Conviction Buy” list, and Wells Fargo has BAC stock on its “Priority Buy” list. With shares still cheap, and growth likely for at the least the next two years, investors should do the same.

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

Article printed from InvestorPlace Media,

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