Is BAC Stock Ready to Go to $40 or $20?

The business looks good, but looks can be deceiving 

Source: Shutterstock

Bank of America (NYSE:BAC) reports its second-quarter results on July 17 before the markets open. BAC stock is having a good year in the markets and is up 20.5% including dividends through July 11. 

Compared to the rest of the global banks, Bank of America is doing just fine in 2019. The question is whether it can keep it going.

Is it a $40 or $20 stock? I’ll look at both possibilities. 

BAC Is a $40 Stock

Bank of America has beaten the analysts’ earnings for four consecutive quarters. In its first quarter of 2019, BAC was expected to deliver 66 cents a share; it came in at 70 cents, 6.1% higher than the consensus estimate. I would be shocked if it didn’t deliver a fifth straight positive earnings surprise. 

The estimate for the second quarter is currently 71 cents, three cents less than the consensus 90 days ago. The potential of a slowing economy along with lower interest rates has reduced analyst enthusiasm for BAC growth in the coming quarters.

However, that would still be 12.7% higher than the 63 cents it earned in Q2 2018. Any time you can grow the bottom line by double digits, you must be doing something right. 

I get that the likelihood of a recession or economic downturn is higher today than it was six months ago, but the economy is still doing incredibly well. America’s corporations are lucky to be a part of such a prolonged economic expansion. 

Now if only the rank-and-file workers could benefit in the form of higher wages, all would be good with the world. 

Sometimes it pays to take a step back and examine a business with the big picture in mind. In order to do that, I took a look at Bank of America’s 2018 10-K. I see a company whose growth over the past two years is remarkably robust. 

Bank of America’s Revenue and Net Income 2016-2018

Segment Revenue (2018) 2-Year Growth Net Income (2018)  2-Year Growth
Overall $91.9B 8.6% $28.1B 10.3%
Consumer Banking $37.5B 18.3% $12.0B 67.9%
Global Wealth & Investment Management $19.3B 9.6% $4.1B 46.7%
Global Banking $19.6B 6.5% $8.2B 42.7%
Global Markets $16.1B -0.17% $4.0B 4.2%

Except for its Global Markets segment, Bank of America’s business is operating on all cylinders. In fact, I think you’ll find that most of the big banks are experiencing the same lack of growth from the capital markets side of the business. 

From where I sit, only a recession can stop BAC stock from hitting $40 by this time next summer.  

BAC is a $20 Stock

In my last article about Bank of America in early June, I waffled on whether-or-not to own its stock. 

While I liked the fact that BAC was generating record profits — as the numbers above can attest — I had a nagging feeling that the good times were about to end. Bank of America stock is up almost 10% since then and looking like it will test its 52-week high of $31.91. 

If you can afford to hold BAC stock for the long haul as Warren Buffett can, I don’t think there’s any reason to sell the shares at this point, despite the black clouds hanging over the big banks. If you can’t wait out the short-term, trade-related volatility, though, owning Berkshire stock is a good Plan B,” I wrote June 4. 

“If you don’t own BAC stock but are considering it, I’d wait for BAC stock price to hit the lower $20s before pulling the trigger.”

That hasn’t happened, but it could. 

InvestorPlace’s Luke Lango recently gave three reasons to be cautious on BAC stock. Lango made a good observation that the bank’s consumer banking business has profited greatly from a move from 1% GDP growth to 3% over the past three years.

I think the numbers above bear this out with consumer banking generating 18% revenue growth along with 68% growth in net income. Should the GDP growth rate fall into the 2% range in the next few quarters, revenues and earnings will slow. 

In fact, Bank of America’s CFO Paul Donofrio said in April that BAC’s net interest income would grow by just 3% in 2019, half the rate earned in 2018, due to lower interest rates and a slowing economy. With the Federal Reserve expected to cut rates when it meets at the end of July, Donofrio was right on the money. 

BAC is going to need a big earnings beat and an optimistic outlook to get it beyond $30. I believe it’s possible you’ll be able to pick up BAC stock in the low $20s by the end of 2019.   

The Bottom Line on BAC Stock  

I’m not going to lie. When it comes to BAC stock, I’m of two minds. 

On one hand, owning a big bank stock like Bank of America should the economy falter, provides peace of mind over smaller, more growth-oriented banks. On the other hand, it’s hard to imagine BAC growing at the same rate over the next two years as it did these past two years. 

Therefore, until I get more information on the 18th, I’m going to stay the course. 

If you already own BAC stock, I’d continue to hold it. If you don’t, I’d wait for earnings to get a better idea where it’s headed next.  

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2019 InvestorPlace Media, LLC