Bank of America - A Case for Buying this Big 'Bad' Bank
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know I'm walking into a firestorm with this one, but here goes anyway. So Bank of America (NYSE: BAC), where do we even begin with the problems this company has had and is currently working through? How about billions in sub-prime mortgage losses stemming from Countrywide, lots of questions about the value of Merrill Lynch, and a bank that many people dislike just on the principle that it's one of the largest banks in the country and people believe that Bank of America and large banks are largely responsible for the issues this country has faced over the last several years.
Add to all of this a stock price that has collapsed from a price in the low $50s down to an intra-day low I remember seeing $2.56 on the tape. Oh, and did I mention that they used to pay a dividend that back in the day gave you a yield of about 3-5% and now that's been cut to a ridiculous $0.04 a year? Yeah, there is a lot of bad news out there.
Now that bad news is already known and I would venture 99% of people looking at Bank of America know about all of the above bad news. The real issue is where do we go from here?
Let me state up front that I firmly believe that the U.S. economy is slowly but surely improving. While it might not be a rocket ship type of recovery and it may not go up in a straight line, there are clear signs everywhere that the economy is improving. This benefits Bank of America possibly more then any other financial institution because of its size and reach across the country. So going with the assumption the U.S. economy recovers, what can we expect from Bank of America? Well let's take a minute and compare Bank of America with two of its competitors Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM). Look at what we find:
|Symbol||Current Price||P/E based on '12 earnings||Expected Growth||Dividend||Off 52-wk high||E:A ratio|
Notice anything in particular? The three metrics that jump out to me about Bank of America are:
1. It is expected to grow the fastest but has the lowest projected P/E.
2. It's further away from its 52-week high than the other two.
3. Its E:A (Equity to Assets) ratio is the highest.
I understand that there are risks with Bank of America stock. I do understand that being one of the largest mortgage lenders in the country exposes the company to further risk. I also know that being one of the largest banks exposes BofA to greater scrutiny than others.
However, in the banking business there is one fact -- big banks can live more cheaply then smaller banks. The reason is there are fixed costs that go into any banking institution and a smaller bank has less depositors to spread those costs across. In addition larger banks have multiple revenue streams that they can draw from, and smaller banks usually don't have the manpower to offer as great of a depth of choices.
The point is Bank of America has some built-in advantages, but the company's performance is being held down by the economy, just as with all of the large banks. Granted, many would make an argument that Wells Fargo and JPMorgan Chase are better managed, but does this mean that Bank of America should be valued at nearly half of JPMorgan Chase (0.91 for JPM versus 0.48 for BAC), or 34% less then Wells Fargo on a PEG basis (0.73 for WFC versus 0.48 for BAC)?
Seems to me the bad news is already priced fully in. Many times the company that seems the worst off is the one that rebounds the fastest when the industry turns. So you tell me, is Bank of America really as "bad" a bank as it's being made out to be, or is it just being underestimated?
The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co. and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company and short APR 2012 $29.00 calls on Wells Fargo & Company. MHenage has no positions in the stocks mentioned above. 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.