Why B of A is still a buy
Though its earnings are disappointing, consumer lending is on the mend. In the long run, that's a very bullish sign.
Jeff Reeves, editor of InvestorPlace.com
Bank of America (BAC) reported earnings before the bell today that weren't exactly earnings at all. The company tallied a loss of $1.6 billion in the fourth quarter of 2010 as bad mortgages continued to eat away at profits. The shortfall equaled a negative 16 cents a share, and the stock's revenue rolled back to $22.4 billion from $25.1 in the same quarter of the previous year.
The news is certainly disappointing -- and not just to me personally, since I own Bank of America stock. These earnings are the latest bad report this week from a financial sector that seemed on the mend but now doesn't look so hot.
But there are still big reasons to be optimistic.
First I'll concede the reality: Banks have been missing the mark lately with Q4 numbers. Citigroup (C) missed earnings expectations on weak trading numbers, and Goldman Sachs (GS) was also held back by prop trading shortfalls. JPMorgan Chase (JPM) posted "record" profits but largely because $2 billion in reserves was added back to the balance sheet. It seems like there has been a steady drumbeat of bad news in the financial sector all week.
Bank of America certainly gets the prize for the worst news of the bunch. Topping the poor earnings is news that BAC also kept aside more than $4 billion for bad loans it may have to buy back from Fannie and Freddie. That's after a deal just a few weeks ago to purchase $2.6 billion in troubled loans thanks to disputes over documentation.
But as I said in my initial recommendation of Bank of America as the best stock for 2011, we knew things were bad. As CEO Brian Moynihan put it, "Last year was a necessary repair and rebuilding year." The bad Countrywide mortgages B of A took over in 2008 are slowly being purged, and the broader economy and housing market are slowly recovering. But these issues can't get fixed overnight.
If you want to be a "glass half full" kind of investor, I would point out t that for the sixth consecutive quarter there were fewer borrowers late in their monthly payments. Losses in bad debt declined $414 million from the third quarter of 2010, thanks to better credit card and home loan performance.
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Of course, for the full-year 2010, the bank reported a loss of $3.6 billion, compared with a loss of $2.2 billion in fiscal 2009. That's not a glass half empty. It's a glass that someone drank all the juice from and has put in the dishwasher for a good soaking.
But the bottom line is that despite Bank of America's possible sell-off today -- it was down 0.3% in early trading -- there are line items to make the case on both sides. As I said on Dec. 29, it comes down to whether you want to talk yourself into buying B of A or talk yourself out of buying.
What has me optimistic about BAC is that the company is the nation's largest consumer lender and that these loans are performing better. Though Bank of America may have to eat some old mortgages because of paperwork issues, for the most part folks are paying their bills.
For Bank of America, and for the American economy as a whole, that is one of the most encouraging signs we can ask for.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP. He holds a long position in Bank of America stock - read his initial recommendation of Bank of America here.
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Why are stronger numbers considered bad news? Investors are worried about the impact on inflation and interest rates.
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