Legal woes clearly in rear view
Litigation risk has been the primary factor holding Bank of America’s (NYSE: BAC) stock hostage for the past few years. The bank has paid out billions in settlement payments. Nonetheless, the bank has made tremendous progress in this regard. Virtually all the legal issues have been satisfactorily resolved.
Operations firing on all cylinders
Bank of America just reported an excellent quarter. The bank reported net income of $4.5 billion, or $0.37 per diluted common share. These results reflect continued solid performance and good customer activity across the board. Furthermore, even in the current challenging interest rate environment, net interest income improved sequentially.
Current valuation presents opportunity and safety
Brian Moynihan and his team have done a tremendous job turning the bank around. Asset quality continues to strengthen and the bank reported record capital and liquidity levels. In fact, tangible book value per share is up 10% to $15.50 per share while book value per share up 7% to $22.41 per share.
(Source: Bankofamerica.com)
The bank traditionally trades for closer to two times tangible book value. With the bank currently trading essentially at tangible book value, the upside potential is vast. What’s more, the margin of safety is substantial as well.
Rising rates on the horizon
The Fed will inevitably have to raise interest rates. The question is not if, it’s when. I say the Fed will raise rates by 25 basis points in 2015. Bank of America is well positioned to benefit from a rising rate environment. This allows the bank to earn even greater profits on the difference between the cost of funding and lending rates otherwise referred to as the net interest margin. Taking into consideration the size of Bank of America’s balance sheet, a small shift in interest rates can have a big impact on the bank’s bottom line. In fact, Bank of America stated in its own disclosure that the bank would make an additional $3.7 billion if rates rose by 1%.
Fundamentals are solid and improving
Bank of America is trading for a PEG ratio of 1.18 and a forward P/E ratio of 10.20.
(Source: Yahoo.com)
The PEG ratio is a broadly used indicator of a stock’s prospective worth. It’s preferred by numerous analysts over the price/earnings ratio because it also accounts for growth. A PEG of approximately 1 is believed to be favorable. Further, the bank’s forward P/E of 10.20 is one of the lowest among the big banks. As you can see by the 20-year chart, the bank has significant room to run if things take a turn for the better.
Bank of America 20-year chart
All these developments provide a nice tailwind for the stock. However, I have determined one additional tailwind for the stock I haven’t heard bandied about just yet. Bank of America could very well turn into a dividend growth story.
Dividend growth prospects are good
Currently, the stock’s dividend stands at $0.20 which provides a yield of 1.25% per share. With the legal bills all paid up, the bank can now focus on increasing the dividend and share repurchases. Basically, you have a chance to get in on the ground floor of this dividend growth story. I like it. So what is holding the bank back?
Downside Risks
- Many believe the Fed will not raise rates anytime soon. This is the prevailing consensus on the street. When the Fed did not raise rates in September, this sent the bank reeling back to the $15 level. If the Fed does not raise rates, the bank’s shares may remain in limbo.
- Technically, the bank is banging up against strong resistance at the $16.50 level. The 50-day SMA has not managed to cross the 200-day SMA. Nonetheless, I believe this is about to come to fruition. When it does, there will be no looking back.
- Bank of America needs to stay on top of cost-cutting efforts to ensure it continues to improve in all areas.
- Current global and domestic macroeconomic and geopolitical issues remain a concern.
- The US housing market will need to stay on track.
Conclusion
A healthy banking system is one of the three pillars of economic growth. I believe the inflection point has arrived for Bank of America. This past quarter’s results underpin my thesis. I’m bullish on Bank of America. The bank’s legal issues have come to an end. The bank has shown numerous areas of improvement on a fundamental basis. The risk/reward equation favors long trades at this time. There’s a substantial margin of safety at this time. One major factor holding the bank back is the technical status of the stock. Look at this as a gift – one last golden opportunity to pick up shares prior to the inevitable run-up in the stock in my book. Nevertheless, I would still layer into any position over time to reduce risk. Those are my thoughts on the subject. I look forward to reading yours.
The post Bank Of America: A Golden Opportunity Is Never Offered Twice appeared first on F.A.News.
