Should You Stick With This Bank?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Back in the late 1990s, Bank of America (NYSE: BAC) was considered to be a safe and reliable bank. Fast forward to 2008 and we saw the close collapse of the banking industry. Almost five years later, Bank of America, along with its peers, continues to struggle returning to their former glory. Part of the problem is the stalling economic recovery. Additionally, expect the financial sector in general to face pressure as the fiscal cliff rapidly approaches. If we did go over the cliff, financials could be one of the worst performers of that period. That is why I am going to be looking at Bank of America with the long-term in mind.
If you keep up on the latest news over the past few years, you would think that Bank of America is still doing very badly. Fortunately, this is not the case with shares up over 70% year to date. However, do not be fooled that everything is fantastic. The bank reported 3rd quarter earnings on October 17 of earnings per share of $0.28 on revenue of $20.7 billion. Analysts polled were looking for earnings per share of $0.18 on revenue of $21.9 billion. As you can see, the bank beat on earnings per share but stumbled on revenue. This just proves that despite strength in shares, the underlying problems still lurk. Currently, there are three factors that are hurting Bank of America from moving forward and producing a meaningful profit: large amounts of toxic debt on its balance sheet, acquisition of Merrill Lynch and Countrywide, and regulation. However, before we get into these factors lets breakdown the fundamentals and see if they warrant a long term investment.
Bank of America has a market cap of $101.6 billion and currently has a "hold" rating from analysts. Currently, the company has a price to earnings of 16 and a forward price to earnings of 9.72. Furthermore, the company has price to book of 0.43, price to cash of 0.96 and a price to free cash flow of 3. Earnings are forecasted to rise 131% next year and 7.2% over the next five years. It should be noted that the bank does have a debt to equity of 2.5. However, after seeing the bank's cash per share ratio of 10, I am not worried about debt. As you can see the bank has a nice cash pile, manageable debt, good forecasted growth for next year and valuation ratios are undervalued. Now, let’s compare these fundamentals to some of Bank of America's top competitors: Citigroup (NYSE: C), JP Morgan (NYSE: JPM), Goldman Sachs (NYSE: GS) and Wells Fargo (NYSE: WFC).
Citigroup has a market cap of $105 billion and has a "hold" rating from analysts. Currently, the company has a price to earnings of 15 but forecasted future earnings give the company a forward price to earnings ratio of 7.75. PEG comes in at 1.44, price to sales is at 1.5, price to book 0.56 and price to free cash flow is at 5.71. Citigroup does have a nice cash pile of 11.5 cash per share ratio. Furthermore, total debt to equity comes in at 2.8. Earnings per share growth only comes in at 14% next year. While Citigroup may have more cash and slightly cheaper in forward earnings, I like Bank of America's growth rates a little more and I like Bank of America's valuation ratios more, collectively.
JP Morgan has a market cap of $154 billion and has a "hold" rating from analysts. Currently, JP Morgan has a price to earnings of 8.6 and forward price to earnings f 7.6. Furthermore, the bank has a price to book of 0.77 and price to cash of 2.9. Cash per share comes in at 14 and total debt to equity is at 3.5. Earnings growth next year comes in at a feeble 6.4% and 7% over next five years. As you can see JP Morgan is cheaper than Bank of America but earnings growth still goes in their favor.
Goldman Sachs has a market cap of $54.5 billion and has a "hold" rating from analysts. Currently, the bank has a price to earnings of 11, forward price to earnings of 9, PEG of 0.53, price to sales of 1.42, price to book of 0.85, price to cash of 0.86 and price to free cash flow of 2. Cash per share comes in at a whopping 135 while total debt to equity is only 6. However, earnings growth next year is forecasted to only grow 8.6% and 21% next five years. Overall, Goldman Sachs is a much more undervalued than Bank of America but the earnings growth still goes in its favor.
Wells Fargo has a market cap of $170 billion and has a "hold" rating from analysts. Currently, the company has a price to earnings of 10, forward price to earnings of 9, PEG of 1.16 and price to free cash flow of 8. Cash per share comes in at 3.23 and total debt to equity is 1.18. Earnings growth comes in at 8.68% next year and 8.74% next five years. Overall, I think Bank of America has a better valuation and better earnings growth potential.
As you can see, Bank of America may not be the cheapest of the group but it does offer the highest earnings growth for next year and it is cheaply valuated.
Back to the three factors that are hurting Bank of America. The first factor I mentioned was toxic debt that it continues to hold. In the past four years, the bank has had to write off $105 billion in bad loans, which mostly came from Countrywide when they were acquired during 2008. This leads me to my next point which is that Bank of America acquired Countrywide and Merrill Lynch during the financial crisis and the bank has been hit with a number of lawsuits which had to do with Countrywide and Merrill Lynch, in addition to inheriting all the bad loans and toxic assets. Lastly, one risk moving forward is the fact that the president may try to revise Wall Street regulation and put harsher capital requirements on banks. The bottom line here is that Bank of America still faces some uphill battles here in the short term but I believe the bank could easily trade above $10 next year. Look for an ideal opportunity to jump into the bank after the fiscal cliff issues are settled.
Bank on this Stock
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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group 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.If you have questions about this post or the Fool’s blog network, click here for information.