Rarely do I get short-term stock calls right (because I think share prices follow fundamentals over the long haul), but my last analysis on Bank of America Corp (NYSE:BAC) has so far proven prescient.
Back in March, I speculated that the BAC stock price had peaked in the near term. Then, the stock was trading above $25 per share, and almost hit $26. That ended up being its high point over the past five years.
Bank of America shares have settled just below $24, so not really much below current levels. But that’s not much of rally, either.
Analyst earnings estimates haven’t moved up much lately. On average, they expect $1.81 in earnings per share this year. For all of 2018, the estimate is $2.18 per share for impressive year-over-year growth of 20.4%.
BAC stock is looking more interesting the longer it takes a breather. The forward price-to-earnings ratio (off 2017 earnings estimates) is already reasonable at just over 14, but falls to 11 if BofA hits its 2018 profit targets.
Those earnings multiples compare favorably to key rivals. JPMorgan Chase & Co.’s (NYSE:JPM)’s forward figures are 14 and 12, respectively. Wells Fargo & Co’s (NYSE:WFC) figures are 13 and 12, respectively. Citigroup Inc (NYSE:C): 14 and 11, respectively.
BAC and Citigroup have been the veritable value plays in the money center bank space. JPMorgan essentially sailed through (well, relatively – many weaker rivals ceased existing) the crisis. So did Wells Fargo, though it recently has been sidelined with an embarrassing sales scandal where certain employees opened fake client accounts to game sales goals.
With the current share price dip, BAC stock is again trading below book value. Shareholders’ equity (or what is left when subtracting liabilities from assets on the balance sheet) per share (also known as book value per share) ended last year a hair shy of $25.
The key metric to compare banks is return on equity. Also known as return on book value, it shows how much profit a company is generating off the equity shareholders have invested (or at least reported on the balance sheet at historical values). Bank of America’s continues to be depressed. Optimists see it improving going forward, as do I.
BofA’s return on equity (ROE) was a paltry 6.8% for all of 2016. It should improve ever slightly to 7.2% this year. And to 8.7% in 2018 — again if it hits its profit expectations.
Wells Fargo’s ROE has consistently exceeded 10% since its recovery from the Credit Crisis. It even hit 14% back in 2013, though has settled below 12%. JPMorgan’s could soon reach 11%. Citigroup’s ROE is below 7% — also woefully short of where it needs to be.
U.S. Bancorp (NYSE:USB), a banking rival that is still more regional in focus (versus the money center banks that operate across the United States, or even internationally) is the best in the business at sustaining a double-digit ROE. It currently sits above 13%.
Bottom Line on BAC Stock
Bank of America (and Citigroup) could see their share prices rally if they can get ROE’s back to double digit levels. In fact, it is a long-term necessity; to justify their existences (or returns above hurdle cost of capital levels of 9% to 10%) they must earn more than the costs of the capital (equity and bonds) that investors have entrusted them with. So far, they are failing shareholders.
Life should continue to improve for the big banks. As interest rates rise, net interest margins (NIM), or the spread that banks make from lending money and borrowing in the form of checking and savings accounts, should increase. This will boost profits.
So should an improving economy. I don’t think there is any hurry to invest in BAC stock through the rest of 2017. But its below-market earnings multiple, improving profitability and growing dividend yield are factors that could push the stock steadily upward for the next couple of years.
As of this writing, Ryan Fuhrmann was long shares of Wells Fargo but did not hold a position in any of the other aforementioned securities.