Bank of America Corporation (BAC, Financial) does not require a great introduction. The bank provides banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, large corporations, and governments worldwide.
One of the largest shareholders of Bank of America is Mohnish Pabrai (Trades, Portfolio), who was selling off one-third of his stake (31%) on the fourth quarter to 3.15 million shares held as of the end of 2014. Buffett Disciple tells Barron's last year “that, if a bank has proper reserves and it’s trading well below tangible book value, that is an undervalued bank".
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 44.2x, trading at a discount compared to an average of 18.9x for the industry. To use another metric, its price-to-book ratio of 0.70x indicates a discount versus the industry average of 1.40x while the price-to-sales ratio of 2.00x is below the industry average of 3.82x. The three ratios indicate the stock is relatively undervalued and so subject to a potential buy.
The stock price has a downward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $8,672, which is not attractive for investors.
The share price has plummeted by almost 3.78% when compared to its closing price of one year ago. Further, the year to date (YTD) return for the stock is -13.14%. Shares fell in early trading on Friday by 1.65% to about $15.53 a share.
Revenues, margins and profitability
Looking at profitability, revenue for the first quarter declined $1.7 billion, to $23.7 billion from $25.4 billion, a decrease of 6.7% compared to the same period in fiscal 2014. However, earnings per share increased in the quarter compared to the same quarter a year ago ($0.27 vs. -$0.05). These numbers were different from the expectations, with $0.29 on revenue of $21.6 billion, according to FactSet. During the past fiscal year, the Charlotte, N.C., bank reported lower earnings of $0.35 vs $0.91 in the previous year. This year, Wall Street expects an improvement in earnings ($1.38 vs $0.35).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BAC | Bank of America | 3.52 |
| RY | Royal Bank Of Canada | 17.81 |
| USB | U.S. Bancorp | 13.64 |
| WFC | Wells Fargo & Co | 12.59 |
| Â | Industry Median | 8.98 |
The company has a current ROE of 3.52% which is lower than the industry median and the one exhibit by U.S. Bancorp (USB, Financial) and Wells Fargo (WFC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Royal Bank of Canada (RY, Financial) could be a more appropriate option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | ROE (%) |
| Dec05 | 16.37 |
| Dec06 | 17.85 |
| Dec07 | 10.62 |
| Dec08 | 2.48 |
| Dec09 | 3.07 |
| Dec10 | -0.97 |
| Dec11 | 0.63 |
| Dec12 | 1.79 |
| Dec13 | 4.87 |
| Dec14 | 2.03 |
The ratio has decreased when compared to its ROE from the years prior to the financial crises. This showed a downward trend which we think is a major weakness.
Other hedge funds
Hedge fund gurus like Steven Romick (Trades, Portfolio) and Brian Rogers (Trades, Portfolio) have added the stock in the first quarter of 2015. The gurus bought 12,111,900 and 29,700,986 shares respectively. On the other hand, the Yacktman Fund (Trades, Portfolio) has reduced the position.
Bruce Berkowitz (Trades, Portfolio)’s Fairholme is the largest investor in the bank as it reported holding 94.30 million shares, down by 4% on the fourth quarter of 2014. Another significant investor of the company is Ken Fisher (Trades, Portfolio)‘s Fisher Asset Management owning 41.93 million shares valued at $750.17 million. The third-largest investor was Richard Pzena (Trades, Portfolio) with 31.22 million shares valued at $558.59 million.
Final comment
As outlined in the article, there are several weaknesses like the slowdown in revenues due principally to lower interest rates on its debt portfolios.We think that consumers are going to borrow more, on a better economic environment. Further, more credit means higher interest rates in the future. The past month, the bank has passed its 2015 stress test which means that capital levels were above the minimum requirements. So based on Pabrai´s commentaries, we recommend buying the stock.
Disclosure: Omar Venerio holds no position in any stocks mentioned
