Bank of America Merrill Lynch Leveraged Finance Conference in Orlando, Florida.
Will Bank of America (NYSE:BAC) be considered the best penny stock by then?
Looking at the largest global banks and you’ll think that they are underappreciated with the potential for long-term profits. The KBW bank index is trading at the lowest level in fifteen years. Highlighted within that index is Bank of America, BAC, the Next Great Penny Stock. Why?
- Bank of America being sued for $10 billion by AIG (AIG)
- Bank of America being sued for $50 billion by shareholders
- Bank of America settles mortgage lawsuit for $8.5 billion
- Bank of America losing customers to debit fees
- Bank of America losing billions from Countrywide acquisition
- Bank of America gets dividend hike rejected by Federal Reserve
- Bank of America sells stake in China Construction Bank to raise capital
- Credit agencies downgrade Bank of America
- Caps on debit card fees for merchants to cost Bank of America hundreds of millions
There is a lot of doubt about the certainty of Bank of America’s earnings going forward. Computing core value is very difficult when there is so much uncertainty. Despite its challenges, Bank of America does have some intrinsic value. It is not a “sell” at any price.
IF Bank of America earns a profit in 2012 and continues to afterwards, Bank of America should sell near book value. 30 analysts that follow the company estimate 2012 EPS to be $0.54 – $1.65, with the average being $1.01. These 30 analysts have no idea how much future write-offs of assets will be or what will happen in haunting lawsuits. However, despite all of the negative stories and challenges Bank of America faces, all 30 analysts that closely monitor BAC believe it will be profitable in 2012.
Merrill Lynch earned $5 billion in 2006 and $7 billion in 2007. This is what Merrill Lynch alone is capable of earning in good times. This year Merrill Lynch is on pace to earn in that range. Bank of America hired 10 advisers across Sonoma and Marin counties in October for its Merrill Edge Financial Solutions Advisers division. Developing on the integration of wealth management, BAC hopes to double the number of Merrill Edge advisers nationally to 1,000 by the end of the year.
Sure, global banks’ share valuations are low by historical standards. Most are trading at less than 1 time book value. In the most recent quarter, the price-to-book of Bank of America 0.29 compared to that of Wells Fargo 1.08. The time when banking stocks were considered cheap, when they were near book value, and overvalued, when they were around 2:1 book value, has passed.
As for Bank of America, while earning trust should be one of its chief concerns, as a shareholder, I continue to think that proving it can regain its ability to earn money will be the primary driver of the stock. I will admit that this may be a tougher task than previously thought as it appears that there is less than expected improvement in the mortgage industry. But so far on the heels of its recent earnings announcement, “mark to market” accounting or not, the bank has shown that there is life after near death.
Bank of America earned $21 billion in 2006 before purchasing Countrywide and Merrill Lynch. In 2007 BAC earned $15 billion. In other words, after enormous write-offs stop and business is back to normal, Bank of America, Countrywide, and Merrill Lynch should be a combined company earning $20 billion a year plus. With a current market value of $75 billion, there is tremendous upside potential.
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