The bank and financial services industry is popular again as macroeconomic factors predict further rises in the Fed’s interest rates.
A bank that is worthy of investors' attention, of course, is Bank of America Corp. (BAC, Financial) Despite an 18% appreciation over the last 52 weeks, the stock is still trading below the 200, 100 and 50-SMA lines.
The bank reported a current share price of $28.80 versus the 52-week range of $22.75 to $33.05. Other metrics are on par or slightly below its peers indicate that it is not expensive. The bank is trading at a price-book ratio of 1.22 times, price-earnings ratio of 16.29 times, price-sales ratio of 3.49 times and enterprise value-to-revenue ratio of 4.25 times.
The price per share is only a few U.S. dollars above both the Peter Lynch Earnings Line (P/E = 15) of $26.6 and the Price at Med P/E without NRI (P/E = 12.53) of $22.22.
GuruFocus made a thorough check on Bank of America through the company’s areas of financial strength, profitability, growth and valuation. Bank of America has a financial strength of 4 out of 10, which is signals that the company is moderately shielded against business slowdowns and recessions.
The profitability and growth rating of the bank stands at 4 out of 10. That means it hasn't had trouble staying profitable, even though its profitability among U.S. banks is not one of the highest in the industry.
Since expected rate hikes will boost profits, the profitability of Bank of America will assist earnings by 17% in full fiscal 2019 and of 22.4% every year for five years.
Wall Street has assigned Bank of America a recommendation rating of 2 out of 5. As of this month, a total of 30 analysts were surveyed on the U.S. bank. A total of 22 are for a Buy approach. A total of seven are for a Hold approach. One analyst thinks that the time to take some profit off the table has arrived. Those are based on analysts' predictions.
The average analyst foresees a 19.7% growth in the market value of Bank of America in the following 52 weeks. The average is a mean value of a total of 27 estimates ranging from $28 to $37.
The forward price-earnings ratio is 11.53 times. For full fiscals 2018 and 2019, consensus predicts net earnings of $2.47 and $2.89 per share. With the second quarter behind us, I have considered a mean earnings per share of $2.69 as an average calculated over the period from the third quarter of 2018 to the second quarter of 2019. When this mean is multiplied by the forward price-earnings ratio, it yields a value of $31.02 per share. That is approximately 8% growth from the current market valuation.
Bank of America is distributing part of its levered free cash flow to shareholders of common stock in the form of 12-cent cash quarterly dividends. If held constant, the quarterly distribution leads to a forward annual dividend of 48 cents, granting 1.65%.
The dividend yield is lower than the industry median of 2.75% and the S&P 500 dividend yield of 1.83%. However, if the stock is acquired at today’s valuation, the transaction involves an earnings yield of 6.2%, which is about two percentage points higher than the monthly average spot rate of the 20-year high-quality market corporate bond. At 3.61%, the average is a mean value of the last 12 monthly spot rates. High quality corporate bonds are those rated AAA, AA or A.
Bank of America's next earnings announcement is scheduled for Monday before the opening of the bell. For the second quarter, analysts predict a net profit of 57 cents per share on revenue of $22.2 billion. While the forecasted net profit is a 24% increase year-over-year, the revenue estimate represents a 3.8% decline from the prior-year quarter.
(Disclosure: I have no positions in any stock mentioned in this article.)
