Is Bank of America Stock Oversold?

by Trefis Team
Bank of America
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Having regained more than 20% of its value since hitting a low of $18 on March 23, Bank of America’s stock (NYSE: BAC) looks quite undervalued at its current level of $22. Our belief stems from the fact that the banking giant’s stock remains about 40% lower than what it was at the beginning of 2020. In fact, it is around 25% lower than the $28-level seen at the end of 2017.

Our dashboard Why Bank of America Stock moved 68.6% between 2016 and 2019 provides the key numbers behind our thinking, and we explain more below. Some of this rise over the last three years was due to the roughly 9% growth in Bank of America’s revenues over this period. This translated into an almost 60% growth in Net Income thanks to lower operating expenses and a drop in the tax rate. Earnings growth, on a per-share basis, was a much higher 76% due to the added benefit of share buybacks. Specifically, the company has invested about $61 billion in repurchases in the last three years, resulting in about 8.7% lower outstanding shares. While Bank of America’s capital situation looks strong, the bank is unlikely to spend much, if anything, on share repurchases anytime soon.

However, Bank of America’s P/E ratio dropped 4.4% from about 13.2x at the end of 2016 to over 12.6x at the end of 2019. While Bank of America’s P/E is down to about 7.5x now, given the volatility of the current situation, there is some possible upside for Bank of America’s multiple when compared to levels seen over recent years. After all, the multiple has been notably higher in each of the last four years – including the low of 9.1x in late 2018.

How Is Coronavirus Impacting Bank of America’s Stock?

Bank of America’s stock has suffered as states and countries are on lockdown due to Coronavirus pandemic, leading to a drop in consumer demand and business spending. The global slowdown could impact the loan repayment capability of businesses and retail customers, resulting in potential losses for the bank – which has a substantial loan portfolio of both consumer and commercial loans. Similarly, the lower market activity would mean a drop in investment banking as well as capital raising deals – resulting in a decline in advisory & underwriting fees. On the other hand, positive growth in the Sales & Trading segment due to higher trading volumes is likely to provide some cushion to the bank’s revenues. While the company’s results for Q1 were along the lines of what we detailed above, results in Q2 will show a significant hit to most of the segments.

However, we expect market conditions to improve over the latter half of the year. While economic recovery could take several quarters, Bank of America’s stock should begin trending higher in a few months.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the Coronavirus outbreak’s impact on a diverse set of Bank of America’s peers. The complete set of coronavirus impact and timing analyses is available here.

Bank of America has outperformed its peer Citigroup since the beginning of 2020. Notably, Bank of America’s stock also outperformed peer Citigroup’s stock over the 2016-19 period.


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