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.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!