Bank of America still looks like a buy
Bank of America shares climb back above $18 for the first time in five months, and Wall Street remains bullish about their prospects.
By Lauren Tara LaCapra, TheStreet
With Bank of America's (BAC) shares rising steadily since mid-February, investors are wondering whether they'll reverse course as they did a few months ago or keep climbing, as analysts predict.
The stock has traded between $14.25 and $18.35 since Feb. 9. It broke through the $18 barrier on March 25 for the first time in more than five months, and has remained at that level for the past few days on relatively light volume.
Bank of America is up about 18% this year as financial stocks have outpaced the broad market, with the KBW Bank Index ($BKX) advancing 21.5% versus gains of roughly 4% and 5% for the Dow Jones Industrial Average ($INDU) and S&P 500 ($INX), respectively, through Wednesday.
Wall Street has grown more bullish on the banking sector's prospects on indications that loan losses may have peaked and the economic recovery is underway. Bank of America benefits from its size and diversity, as the biggest US bank and a leader in many financial services categories. Chief Executive Brian Moynihan plans to whittle down less profitable businesses and grow market share in others, fueling the optimism.
Of 27 analysts that cover Bank of America, 23 rate its stock “buy,” and the other four rate it a “hold.” The median 12-month price target for the shares is $21, suggesting the shares could climb 18%.
First-quarter results will be the next major catalyst for the stock. The company is scheduled to report its numbers on April 16, and the current average estimate of analysts polled by Thomson Reuters is for a profit of 8 cents a share on revenue of $27.6 billion, down from earnings of 44 cents a share on revenue of $37.76 billion in the same period a year earlier. That would be an improvement from a loss of 60 cents a share on revenue of $25.1 billion in the fourth quarter.
On Wednesday, Citigroup (C) analyst Keith Horowitz reiterated his “buy” rating on the stock. He said that despite being the biggest US mortgage lender, concerns that Bank of America and its peers will have to buy back poorly underwritten loans from Fannie Mae (FNM) and Freddie Mac (FRE) are overblown.
"While the consensus view is that [Bank of America] has larger risk versus peers, we believe concerns are overdone and that risk is manageable," Horowitz said.
Taking a different tack, Stifel Nicolaus analyst Chris Mutascio asserted a week earlier that "if book value is the measure then [Bank of America] is the stock."
Mutascio said investors have been paying close attention to stated book value since the start of 2010, putting a premium on stocks with low multiples, rather than their expected ability to produce earnings. The six large-cap stocks he covers that were trading below book value at year-end have risen 33%, on average, whereas those trading above book value at that time have risen just 15%.
Some outperformers, including Regions Financial (RF), SunTrust (STI), KeyCorp (KEY) and Fifth Third (FITB), are expected to lose money in 2010. Underperformers like BB&T (BBT), PNC (PNC), US Bancorp (USB) and Wells Fargo (WFC) are expected to post a profit.
Still, Bank of America, which is up just 14% so far this year, is trading at 0.7% book value and is expected to earn 80 cents per share in 2010, on average.
Its stock "has a good bit of catching up to do given that it remains very inexpensive on the valuation metric of choice currently (price-to-book value) as well as on a price-to-normalized earnings basis, which is the measure investors will migrate to at some point," Mutascio says.
Rochdale Securities analyst Richard Bove has also been bullish on Bank of America's prospects, saying in early March that its stock -- then trading at $16.71 -- could potentially double in price. In more recent reports, the analyst has been supportive of Moynihan's strategy, saying it "may create a better and stronger company."
Bove notes some potential risks: New regulations and the possibility that Moynihan may not be able to restructure a business model that's been in place for several decades. Nonetheless, he has a 12-month price target of $21 and rates Bank of America shares a “buy.”
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