BAC Regaining its Former Glory?
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The town I grew up in had a Bank of America Center on the main street, my school had a Bank of America (NYSE: BAC) conference room, we even had two BAC's within walking distance of my house - you could say they had quite the presence. And this isn’t unique to my hometown. It’s called Bank of America for a reason. Yes, it is clear now that BAC did some things wrong leading up to the crash in 2009 and they still do not have everything straightened out, but the company has such a large base in the US that as the economy rights itself, this bargain priced stock is bound to grow with it.
They have lost respect on a national level and their balance sheet isn’t looking too pretty. Do I think the stock is a good buy right now? I sure do. It is the very fact that they did a number of things wrong in the last 5 years that makes their current price so attractive. They may have lost a lot of brownie points on superficial levels but the intrinsic value of the stock hasn’t gone down nearly as much as it may seem.
The company has a book value per share of $20 and just last week they passed the Fed’s stress tests which gave their stock quite a boost. The stress test demonstrated that the company has enough capital to survive another economic downturn and with this capital is earnings potential for the company. Bank of America has been involved in some huge cost cutting operations of late as well as an effort to raise additional capital and dispose of non-core business aspects. They haven’t been trying to make headlines; they’ve been keeping under the radar and restoring all of their vitals. CEO Brian Moynihan has had one focus and that has been to lower expenses and become a leaner operation. Now in addition to cutting costs they want to make a profit and this may mean more charges which will irk customers. They’ve gotten their share of bad press for this, but they haven’t been alone in some unfair fees. BAC has also had its fill of legal battles since ‘09, some of which resulted in a decent loss of cash, but it seems to have most of this behind it, and that is reason for hope.
BAC has a few scary financials with the main one being that debt exceeds total cash by $100 billion. For me this is offset somewhat by the above mentioned book value of $20. Though with BAC planning to write down 200,000 mortgages currently facing foreclosure, this number may go down - but unless there are more drastic write downs coming soon it is likely that book value will stay above the stock price for the time being which for me is often a signal to think about buying in. They have not been focused on giving out meager dividends to satisfy investors but instead have put this money back into the company to help get the debt monster off of their back. Personally I would much prefer my stock to have a more solid financial foundation which causes it to go up by 5-10% than get a 1% dividend. BAC has also been focusing on operations in the US which has allowed it to be protected somewhat from recent European debt related price declines.
So yes they have been moving in the right direction but this doesn’t mean that they are all the way in the clear. BAC has wide exposure to a number of liabilities and if the economy takes a turn for the worse again they will be on a slippery slope. This comes down to a matter of personal judgment. If you think the economy is going to keep headed up for a while and that Europe’s situation is stabilized for the time being, BAC’s debt may not be your biggest worry; while on the other hand, if you are unsure about the future of the economy, you might want to take a closer look.
There are other major banks who I would argue are in a better overall position. Wells Fargo being one of them. Wells Fargo's stock (NYSE: WFC) has done quite well the last 6 months; they just raised their dividend, and they didn't get the bad wrap that BAC did with the economic downturn. But there is one major difference and that is one of price. BAC may be in a slightly worse position, but for how much better of a bargain it is, that doesn't concern me. I feel like I am getting more for my money with BAC.
For me this can be the ideal type of stock. It has been declining in both price and reputation for the last 5 years making it a real deal. Yet despite this reputation decrease, Bank of America still has massive assets in the United States and it seems to be making a turnaround. The economy, at least for the time being, seems to be on a somewhat upward track, and as the economy goes up it is likely that BAC will follow.
If you think that Bank of America will be here for the long haul and you agree that they are undervalued right now then it is a hard argument not to get it. If you are wary of the debt and exposure to liability that BAC has then I would either do some more research or sit this one out.
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