Is Bank of America Still Attractive?

With shares of Bank of America Corporation (NYSE:BAC) trading at around $12.24, is BAC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

According to The Goldman Sachs Group (NYSE:GS), Bank of America has hit the wall. For years, it was an attractive beauty that turned heads everywhere. Now, apparently it needs Botox as well as other enhancements. Goldman Sachs has cut Bank of America’s earnings forecast by 15 percent and has stated that the stock could be headed lower. However, is Goldman Sachs likely to be correct?

There are many positives and negatives for Bank of America, but this story really comes down to one simple conclusion, which we’ll get to later. For now, let’s take a look at some positives.

Positives for Bank of America include a reduction in loan servicing workload, the cutting of expenses in many areas, dealing with lawsuits in a responsible manner, and consistent EPS growth on an annual basis.

Taking a closer look at these positives, the cutting of expenses is what has led to EPS growth. Revenue has actually been decreasing since 2009, which is rare in today’s environment. This would usually be cause for concern, but Bank of America comes in at the expert level when it comes to making any situation look good. This, in turn, helps the stock price. This might sound cynical, but whatever helps the stock price is a positive. The only problem is that expenses can’t be cut forever. Or can they? If paced correctly, then perhaps it’s possible.

On a truly positive note, Bank of America has been taking steps to right all of its wrongs. This is a good sign. The irony is that by taking this approach and being more responsible, growth potential isn’t nearly as strong as in the past, which is why cost-cutting measures are so important.

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One way Bank of America is showing innovation and leadership is by installing ATM with Teller Assist machines. This means customers will have the option of communicating with a teller while at an ATM machine. The teller feature will be available from 7 a.m. to 10 p.m. on weekdays and 8 a.m. to 5 p.m. on weekends. Customers will have an opportunity to cash checks for their exact amounts, receive cash withdrawals in a variety of denominations, deposit checks with cash back, split a deposit into two or more accounts, and more.

It’s obvious that Bank of America is aiming to be a more responsible company that will have more of a focus on long-term sustainability than quick and large profits. Whether this is a positive or a negative for an investor depends on the type of investor.

Let’s take a look at how Bank of America stacks up to its peers in the fundamentals department. The chart below compares basic fundamentals for Bank of America, Citigroup (NYSE:C), and Wells Fargo & Company (NYSE:WFC). Bank of America has a market cap of $132.58 billion, Citigroup has a market cap of $133.83 billion, and Wells Fargo has a market cap of $197.53 billion.

BAC

C

WFC

Trailing   P/E

48.98

18.04

11.15

Forward   P/E

9.35

8.44

9.63

Profit   Margin

5.57%

12.71%

23.78%

ROE

1.79%

4.27%

12.89%

Operating   Cash Flow

 -$13.86 Billion

 $14.27 Billion

 $58.54 Billion

Dividend   Yield

0.30%

0.10%

2.70%

Short   Position

N/A

1.50%

0.90%

 

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Wells Fargo is the most impressive in the fundamentals department. This should come as no surprise. Let’s take a look at some more important numbers prior to forming an opinion on Bank of America…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Bank of America is considerably weaker than the industry average of 1.20. Once again, Wells Fargo is the most impressive.

Debt-To-Equity

Cash

Long-Term Debt

BAC

2.53

$524.27 Billion

$645.59 Billion

C

2.63

$709.28 Billion

$557.39 Billion

WFC

1.16

$206.53 Billion

$184.55 Billion

 

T = Technicals Are Strong  

Bank of America has outperformed Citigroup and Wells Fargo over the past year, but Wells Fargo has been the steadiest performer over a three-year time frame. Wells Fargo also yields 2.70 percent whereas Bank of America yields 0.30 percent and Citigroup yields 0.10 percent.

1 Month

Year-To-Date

1 Year

3 Year

BAC

1.41%

5.52%

37.68%

-33.31%

C

-6.04%

10.90%

29.27%

-3.38%

WFC

2.63%

10.38%

15.10%

22.64%

 

At $12.24, Bank of America is trading above all its averages.

50-Day   SMA

11.92

100-Day   SMA

11.34

200-Day   SMA

9.87

 

E = Earnings Have Been Improving             

Revenue has been in steady decline while earnings have been on the rise. It’s rare to see such a consistent disconnect between revenue and earnings.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

113.11

150.45

134.19

115.07

100.08

Diluted   EPS ($)

0.54

-0.29

-0.37

0.01

0.25

 

When we look at the last quarter on a year-over-year basis, we see declines in revenue and earnings. However, there was EPS growth on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

29.60

26.89

26.41

24.47

22.31

Diluted   EPS ($)

0.18

0.03

0.19

0.00

0.03

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The following is a recent quote from Ben Bernanke: “The resilience of the U.S. banking system has greatly improved since 2009.” On the other hand, there has been a recent slowdown in lending, M&A activity, and IPOs.

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Conclusion

Bank of America is making responsible decisions, and EPS has improved on an annual basis. On the other hand, increasing revenue will be a challenge. Based on such conflicting paths for revenue and EPS, a lot of the stock’s performance will depend on investor perception. That being the case, Bank of America is a WAIT AND SEE.

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