I’ve been bullish on Bank of America Corp (NYSE:BAC) for some time now. And I don’t see any reason for that sentiment to change. BAC stock remains reasonably valued, if not outright cheap. The benefit of higher Fed rates on net interest margin still hasn’t arrived in full. And Bank of American continues to manage credit risk well.
The bull case isn’t much different from the one I laid out over a year ago, when I argued Bank of America stock would clear $30. And with tax reform in the books and interest rate hikes likely on the way, I’m sticking with that bull case.
As always, there are risks here. Bank stocks have a fair amount of cyclical exposure, and there are some concerns on the edges about overall debt levels in the U.S. But with BAC stock still so cheap, more than enough risk is discounted. The potential rewards are not — at least not yet.
Q4 Shows More Upside Potential for BAC Stock
I wrote last month that Bank of America was likely to see a bit of disruption, though I thought it might come around the company’s Q4 report in mid-January. BAC stock did decline modestly after the report but quickly resumed its upward trend.
It wasn’t until the entire market went a bit haywire over the past few weeks that BAC hit some turbulence. But a 2.7% gain on Monday seems to have righted the ship — for now.
That said, I can see why some investors might want to wait for a better entry point. Clearly, the increased volatility in broad markets could read across to Bank of America stock at some point. The stock has gained 31% over the past year and has nearly doubled since the U.S. presidential election.
It’s outperformed JPMorgan Chase & Co. (NYSE:JPM), Capital One Financial Corp. (NYSE:COF) and Citigroup Inc (NYSE:C). On this site last week, Bret Kenwell argued that $28 would be a “screaming buy” point, and I can’t say I disagree with him.
But $31 still looks cheap enough to ride any near-term volatility. Bank of America has catalysts on the way and a stock price cheap enough to stay patient.
Catalysts on the Way
The most obvious benefit to Bank of America earnings would be rate hikes from the Federal Reserve. CFO Paul Donofrio said back on the Q4 2016 conference call that a one percentage point increase in Fed rates would add $3.4 billion in net interest income — over $0.25 per share in net earnings.
This has been an odd, and difficult, environment for the U.S. big banks of late. Creating some reasonable spread — and being able to pay depositors a material interest rate — should help Bank of America and its peers get back to the core business of banking.
Corporate tax reform is helping earnings going forward, moving BAC’s GAAP tax rate for 2018 to 20% from 29%, per the Q4 2017 conference call. Lower taxes should help clients, too, accelerating lending activity for Bank of America as corporate projects achieve higher net return on investment.
That in turn should drive a dividend increase. CEO Brian Moynihan said on the Q4 call that Bank of America wasn’t necessarily looking to use its excess cash for acquisitions. With bonuses paid and charitable contributions increased, much of the rest will go to shareholder returns.
That no doubt will include a buyback but also creates a path for a large dividend hike. With BAC stock yielding just 1.5% at the moment, sharp dividend growth could bring income investors into the Bank of America shareholder base as well.
Bank of America Stock Is Cheap Enough
To top it all off, Bank of America is executing well. Targets for operating expenses will be met in Q1. So will goals for return on assets and return on equity. And the continuing problems at rival Wells Fargo & Co (NYSE:WFC) opens the door for possible market share gains.
That does suggest less growth potential going forward, as costs have been cut and improvements made. But BAC stock still isn’t priced for much growth. The stock trades at less than 11x 2019 EPS, and 1.27x book value. Both figures look much like they did a year ago, and both still have plenty of room to expand.
Bank of America obviously needs the economy to cooperate, but beyond that, it simply needs to keep doing what it’s been doing. A multiple expansion to 13-14x forward EPS — where BAC traded before tax reform — and ~1.4x book value both get Bank of America stock to $35, or higher. And that’s a reasonable price target over the next 12 months.
Admittedly, that’s not huge upside, and I don’t expect BAC stock to nearly double over the next 15 months as it has over the last 15. But with catalysts on the way, an attractive valuation, and a bank running well, the rally here isn’t over. I’m not backing off my bullishness toward BAC stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
