With shares of Bank of America (NYSE:BAC) trading between $9 and $10 since the company’s last earnings release, is BAC a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement:
Bank of America has received a great deal of criticism regarding its mortgage-related acquisitions, namely Countrywide Financial and Merrill Lynch. The company was once the biggest bank in the United States in terms of assets, but a string of mortgage-related lawsuits forced the bank to shrink its balance sheet. So far, current Chief Executive Officer Brian Moynihan has attempted to make the bank a smaller and more efficient business. Yet in its coverage of the company, The New York Times stated that it “continues to be more troubled than the most of the nation’s other large banks.”
But Stifel Nicolaus analyst Christopher Mutascio has a different opinion; on Monday, the firm upgraded shares of Bank of America to a Buy rating and gave the stock a $11 price target, illustrating that industry sentiment is changing. In the accompanying research note, the analyst stated that the bank had “rebuilt its capital ratios much faster” than expected, an observation that was partly responsible for the bank’s upgrade. Mutascio now predicts that the company’s earnings per share could increase by 30 percent in 2014, while other major banks are expected to report growth of 5 percent. However, as Barron’s noted, “those estimates still depend on Bank of America whittling away at its massive mortgage servicing portfolio, which is hurting the bank’s attempts to cut costs.”
Under Moynihan’s leadership, the bank’s capital levels have improved, and Bank of America now ranks first among JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C). Since he became the company’s Chief Executive Officer in January 2010, Moynihan has made it his priority to build what he termed a “fortress balance sheet,” and on October 17, the day Bank of America released its third quarter earnings report, he declared victory. As the bank’s results showed, according to the rubric used by the Basel III regulatory standards, the bank had capital levels of 8.97 percent. Comparatively, Citigroup had levels of 8.6 percent in the last quarter, JPMorgan had 8.4 percent, and Wells Fargo had 8.02 percent.
The credit for the bank’s improvement is often given to Moynihan’s “Project BAC.” Named for the company’s stock market ticker symbol, the program was designed to make the company take less risk, generate more revenue from its existing customers, and become a more powerful player in international investment banking.