Bank of America Needs to Give Good News
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bank of America (NYSE: BAC) was by far the best performing major financial stock of 2012, more than doubling throughout the year. With the company set to report on Thursday, the market will be keeping its ears open for signs that a) justify the gains, and b) are indicative of future performance.
Bank of America is the second largest U.S. financial holding company, with total assets of $2.2 trillion. Although the financial crisis hit the company hard (though not as hard as some others!), the company has taken measures to strengthen their financial position. I would even go so far as to say that Bank of America took advantage of some of their weaker competitors to increase their market share, which could be a positive catalyst over the long run.
In the fall of 2008, Bank of America accepted $45 billion in loans from the U.S. Government and also acquired former rivals Countrywide Financial and Merrill Lynch. As I stated before, these moves should ultimately increase market share and hence increase shareholder returns; in the immediate sense they have caused headaches for the bank as the mess those two acquisitions brought with them gets sorted out.
Most notably, in 2011 the company announced a settlement of $8.5 billion to a group of investors who had purchased Countrywide’s mortgage bonds pre-2009. The company has also set aside $5.5 billion to buy back defective mortgages in the future, as well as $6.4 billion to cover future lawsuits, foreclosure delays, etc.
Just recently, the company announced another settlement as a result of investors claiming that they were misleading about the Merrill Lynch acquisition. Essentially, investors claimed that Bank of America executives concealed heavy losses when seeking shareholder approval for the deal. I would expect the settlement, in the amount of $2.43 billion, to be a topic of discussion during Thursday’s conference call.
As far as the earnings numbers themselves go, consensus estimates call for earnings of $0.20 per share for the fourth quarter and $0.42 for the year. More important than the number itself will be the company’s forward outlook. Analysts call for earnings to rise to $0.97 and $1.26 in 2013 and 2014, respectively, however the company will need to have an equally optimistic outlook in order to be a positive catalyst for the stock.
Currently, I think the stock is fairly valued, but not as attractively valued as some of its rivals, particularly Citigroup (NYSE: C), which is projected to have better earnings growth and currently trades at a more attractive P/E ratio of 18 times TTM earnings. Bank of America, by contrast, trades at 28.6 times 2012 earnings, and shareholders are going to want to hear justification for this.
One final thought: With the recent rally in the S&P, it seems that traders are expecting earnings numbers that beat expectations and are reacting badly to companies simply meeting expectations. As I write this, the first major financial earnings report of the season occurred when Wells Fargo (NYSE: WFC) reported its results. Even though the company reported 91 cents per share, beating estimates by 2 cents, and revenue of $21.9 billion, in line with expectations, the stock reacted negatively, currently down 1.36% after what I think was a good (but not excellent) report. The market wants excellence, and with Bank of America’s performance over the past year, I would have to predict that the expectations of traders are even higher. It is difficult to justify a gain of 108% in one year, and that is the burden on Bank of America on Thursday.
KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of Bank of America, Citigroup Inc , and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!