Let's clear up one thing: Bofa can only go higher once it's finally done with paying penalties and other costs related to the 2008 financial crisis and its purchase of Countrywide Financial.
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In the meantime, the bank will most likely report a 9-cent loss in the third quarter, its second of the year due to fines or penalties from the mortgage mess during the financial crisis. Bank of America is expected to earn between $1.40 to $1.79 a share in 2015. The estimates reflect that the bank has cleared a majority of its litigation and legal costs from major cases with the Department of Justice and other federal housing agencies from this year.
Even with the almost $26 billion in settlements behind the bank this year, Bank of America is woefully undervalued compared to the other mega-money center banks Citigroup (C) , JPMorgan Chase (JPM) and Wells Fargo (WFC) .
As you can see from the table above, although Bank of America has fared better than Citigroup and JPMorgan in the short term (year-to-date) with a return of 2.9%, it is 2.5 times below the YTD return of the basket of financial institutions held in the Financial Select SPDR ETF (XLF) and well below the five-year period since the 2008 financial crisis of almost 62%. Also, BAC not only has the lowest price to book of this group (including below the industry average) but the lowest of all the largest 25 U.S. banks I follow -- talk about value!
The chart below emphasizes how Bank of America has performed over the last five years compared to the XLF ETF or the average financial institution within the XLF:
Even though the bank has more tripled in price over the last three years since posting a post crisis low of $4.92 set in December 2011, the bank can more the double its current price.
Nobody can argue Bank of America isn't in better shape today than it was on April 10, 2010, when it set its five-year high of $19.86. The bank has since paid out over $60 billion in legal costs, settlements and fines during the financial crisis since 2008 -- by far the most of any bank.
So how do we get the stock to $30? The table below should give you some idea of how the price target can be achieved:
The two settlements in 2014 accounted for almost $16 billion in cash settlements, or $1.52 per share, based on 10.5 billion shares outstanding. If BAC had not had those charges, the bank would have earned $1.92 in 2014, according to analysts' average estimates. With an historical P/E of 15 times, the bank would have a price target of almost $29 per share.
Estimates for 2015 of $1.79 are conservative given that the bank will probably have favorable economic tailwinds with higher net interest margin spreads in a rising interest rate environment from Federal Reserve key benchmark rate hikes.
Furthermore, the bank will more than likely gain a few more cents per share on earnings next year after being given the green light on a share buyback program of at least $4 billion in shares nixed by the Fed this past spring because of a miscalculation on capital calculations (and partially offset by another dividend increase to shareholders).
At the very least, the bank will not have the overhang of another large record-setting litigation settlement going forward, which should allow the bank to focus it bolstering its core lending and investment banking business. At a forward P/E of 17 times the bank should achieve a stock price of over $30 a share.
At the very least, the bank will not have the overhang of another large record-setting litigation settlement going forward, which should allow the bank to focus it bolstering its core lending and investment banking business. At a forward P/E of 17 times the bank should achieve a stock price of over $30 a share.
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