Bank of America Is Not Cheap Anymore

Bank of America Corp (NYSE:BAC) was a great value stock in the first half of the year. Investors had been worried that the bank would prove to be “too big to succeed” as it consisted of a giant financial company with many different business interests. It had also been the target of consumer activists who were furious at the bank’s plan to begin charging a fee for providing debit card services to its customers. These and other pressures caused the stock to trade at a remarkable discount to its book value and to the earnings multiples of its peers. But then the market did its job. Bank of America Corp is up 68% year to date and as of this writing is close to $10 per share, a level it last reached in July 2011.

FAIRHOLME (FAIRX) Bruce Berkowitz

In the third quarter, Bank of America’s revenue and earnings were both down substantially from the figures from the third quarter of 2011. The top line declined by 26%, which nearly wiped out the bank’s earnings; net income was also down relative to each of the intervening three quarters. The bank still trades at a large discount to the book value of its equity: Bank of America’s P/B ratio is 0.5. However, book value per share has not increased in the last year (though tangible book value has). In addition, the company’s quarterly report shows that it is certainly shrinking its operations: compared to a year earlier, the number of banking centers, ATMs, and employees decreased by 3%, 8%, and 6% respectively. On an earnings basis, the valuation isn’t quite as good relative to other banks as Bank of America Corp trades at 10 times consensus earnings for 2013.

Bruce Berkowitz’s Fairholme was the largest holder of the stock out of the funds and other notable investors tracked in our database of 13F filings at the end of June, reporting a position of just over 100 million shares (find more of Bruce Berkowitz’s favorite stocks). Platinum Asset Management, an Australian fund managed by Kerr Neilson, increased its stake by 17% during the second quarter to a total of 35 million shares (see more stock picks from Platinum Asset Management).

We can compare Bank of America to Citigroup Inc. (NYSE:C), Wells Fargo & Company (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and PNC Financial Services (NYSE:PNC). Citigroup has been another value bank that was accused of being overstretched, and that company still carries a low P/B of 0.6 but also trades at 8 times forward earnings estimates. It too saw a large decline in revenue in its most recent quarter compared to the same period last year, which brought earnings down 88%. Read our recent analysis of Citigroup. JPMorgan Chase, like Citi, has a forward P/E of 8 and with investors considering it a more stable bank it is priced at only a small discount to book value- the P/B ratio is 0.9. And its business is doing considerably better, with revenue and earnings considerably higher in the third quarter than in Q3 2011. We’d rather own it than Bank of America.

PNC is priced similarly to JPMorgan Chase: its P/B is 0.9, and its forward P/E is 9. We don’t see it as an equivalent investment, however, because while the bank did grow its business last quarter the growth rate was well below what JPMorgan Chase achieved (earnings were up 10% from Q3 2011). It is also smaller in terms of market capitalization, and carries a higher trailing earnings multiple as well (of course, it might still look better than Bank of America or Citi). Wells Fargo’s stock price has lagged in recent months as many of these banks have rallied- it is only up 20% so far this year, trailing all of these peers we’ve discussed except for PNC- but it is still perceived as the safest, most reliable bank for investors. As its earnings have grown, its earnings multiples have come closer to the same ~10 range and so it may become a buying opportunity soon even though it actually trades at a premium to the book value of its equity.

Bank of America is cheap on a book basis, and we like that it is making progress in reducing costs. However, other banks such as JPMorgan Chase are also trading at a discount to book value (though a much smaller one) and appear to be doing a superior job at generating income from those assets and at growing their businesses.

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