Is It Time to Go Back to Bank of America?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It would be something of an understatement to say that Bank of America (NYSE: BAC) has had a difficult time the last five years. The financial crisis damaged its business by vaporizing assets in the bank’s portfolio, and management did not help matters by absorbing troubled Countrywide Financial and Merrill Lynch. Public sentiment toward Wall Street remained poor even after the worst times of the financial crisis had passed, and spiked again -- this time directed particularly hard against Bank of America -- when the bank began to introduce monthly fees for many consumer debit cards, a charge which the bank was forced to abandon. As a result, Bank of America’s stock is down about 85% from where it was five years ago.
Perhaps things are changing as the U.S. recovery continues to roll ahead. Bank of America is up over 25% for 2012, blowing past the broader market, and beat analyst earnings expectations in the second quarter of the year (albeit after reporting earnings of three cents per share versus an expectation of 12 cents in the first quarter). Net interest income was down, but non-interest income grew immensely compared to the second quarter of 2012 and that quarter’s 90 cent per share loss was replaced on a trailing basis by a gain of 19 cents per share. The second quarter also looked good compared to the first quarter of 2012: revenue was down slightly but expenses fell as the bank successfully cuts costs, and net income grew from $650 million to $2.5 billion. The Tier 1 common capital ratio under Basel 1 increased to 11.2%, which was up half a percentage point from the first quarter of the year.
On a valuation basis the stock may have further to run. Bank of America trades at 0.4 times the book value of its equity, implying that if its asset portfolio is worth even close to the company’s internal valuations the stock is well undervalued. Both the trailing and P/E multiples are 8, squarely in value territory though the similarity implies that sell-side analysts do not expect much earnings growth in 2013 compared to the last four quarters.
Eighty-seven hedge funds owned Bank of America in the first quarter of 2012, allowing it to make our rankings of the ten most popular stocks among hedge funds. Bank of America is a favorite of Bruce Berkowitz’s Fairholme, which owned 103 million shares at the end of March. Berkowitz has had a large position in the stock for over a year. Platinum Asset Management, a large Australian hedge fund managed by Kerr Nielson, reported owning 29.8 million shares; Platinum had initiated this position in the second quarter of 2011 (find other stocks in Platinum Asset Management's portfolio).
Bank of America’s closest peer in terms of being a value-priced megabank with a poor reputation is Citigroup (NYSE: C). Citigroup and Bank of America both have market capitalizations of about $80 billion and P/B ratios of 0.4; Citigroup, however, is down for the year. Wells Fargo & Co. (NYSE: WFC), which carries a less tarnished reputation, trades at a P/B ratio of 1.3. This and its trailing P/E ratio of 11 do not make it particularly overpriced, but these figures are certainly higher than the corresponding ones for Bank of America. Wells Fargo does have an advantage in that it pays a 2.6% dividend yield; it is a safer bank, but we believe it is a higher priced one. Bank of America can also be compared to JPMorgan Chase & Co (NYSE: JPM), which pays an even higher dividend yield than Wells Fargo at 3.3%. JPMorgan Chase trades at 0.7 times the book value of its equity and eight times its trailing earnings, and furthermore has seen insider buying.
We think that these banks are priced fairly low in general compared to their value if an investor is willing to take a risk on global macro factors, and that Citi and Bank of America are particularly good value stocks.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Citigroup. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.