Is Bank of America Stock Undervalued?

Bank of America’s (NYSE: BAC) stock rallied more than 40% in 2019, with the bank’s share price averaging just above $33 for the year. Despite this strong growth over 2019, we believe that the bank’s stock still has room for growth. Trefis details the key components of Bank of America’s valuation in an interactive dashboard along with our forecast for full-year 2020 and estimates the fair value of Bank of America’s stock to be $37 per share – 10% higher than the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

We arrive at the stock price estimate for Bank of America as:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

Corporate & Commercial Banking Business Will Drive Growth In Bank of America’s Revenues For Full Year 2020

• Total Revenues have increased 9% from $83.7 billion in 2016 to $91.2 billion in 2019, and are expected to grow 1% to $92.4 Billion in 2020.
• Corporate & Commercial banking revenues are expected to increase by 3% y-o-y. This growth would be driven by higher treasury revenues due to an expected 5% growth in treasury client assets
• Consumer banking, which is the highest contributing segment, will likely report a 1% reduction in revenues for the year due to a slight reduction in net interest income as the impact of the Fed’s rate cuts begins to show.
• Although wealth management business has grown by 11% over the last four years, we expect it to drop by 4% in 2020 due to lower fees as a % of Total Client Balances.
• Notably, Sales & Trading and Investment Banking revenues are expected to decline by 3% and 2% respectively.

Our interactive dashboard analysis, ‘Bank of America Revenues: How Does Bank of America Make Money?’, captures the factors that have driven changes in revenues for Bank of America’s segments over recent years along with our forecast for the next two years.

Higher Operating Margin Would Improve The Net Income Figure

• Bank of America is expected to report Net Income of $27 billion in 2020 which is 4% more than the previous year.
• The operating margin is expected to increase by 310 bps in 2020 as compared to the previous year due to a decline in expenses despite an increase in revenues.
• While the effective tax rate is expected to be higher in 2020, growth in operating income should more than offset its impact – resulting in the adjusted net income margin improving by 78 bps from 28.5% in 2019 to 29.3% in 2020.

This Lends Support To A $37 Price Estimate For Bank of America’s Shares

• Bank of America has regularly invested in share repurchase to boost shareholder returns. Its share repurchase program is likely to touch $24.6 billion for the full year 2020.
• Higher adjusted net income coupled with a steady decline in outstanding shares should result in Bank of America’s EPS figure increasing to $3.10 in 2020
• Using an 11.8x P/E Multiple on expected 2020 EPS of $3.10, this works out to our price estimate of $37 for Bank of America’s Stock.

Our interactive dashboard – ‘Bank of America Valuation: Expensive or Cheap?’, provides details about how Bank of America’s P/E multiple compares with peers Citigroup, JPMorgan, and Goldman Sachs.

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