Free Essay

Stockanalysis: Bank of America

In: Other Topics

Submitted By tnlmccoy
Words 1391
Pages 6
Stock Analysis: Bank of America Corporation (NYSE: BAC)

Stock Analysis: Bank of America Corporation (NYSE: BAC)
Corporate Background and Lifecycle Analysis
The current Bank of America Corporation (NYSE: BAC) was formed from the merger of NationsBank Corporation and BankAmerica Corporation in 1998; however, the bank’s history traces its roots back to the late 19th century. (“Bank of America Corporation,” n.d.). From humble beginnings, Bank of America’s founder, Amadeo Peter Giannini expanded his community reach by purchasing numerous well-placed banks heralding the first attempt at branch banking. (“Bank of America Corporation,” n.d.) BAC’s near downfall was the acquisition of Countrywide Financial Corp in July 2008 just before the mortgage collapse triggered the financial crisis. BAC was one of several banking companies that received significant aid from the U.S. Federal Reserve in the form of large capital investments totaling $45 billion dollars. Today, BAC is a global leader in banking and investing serving 33 million plus U.S. households and over 35 additional countries. Operations include more than 15,800 automated teller machines, 4,800 branches, and a robust online banking platform with over 31 million active users and 16.5 million mobile users (“2014 Bank of America,” 2015); however, the stock has yet to recover to its former performance.
The banking industry is highly competitive and mergers and acquisitions are prevalent as industry leaders struggle for dominance. While traditional brick and mortar banking has achieved the industry lifecycle maturity stage, the digital aspect of banking and investing is in the consolidation stage as banks continue to drive users to an expanding market of online experiences.
Analysis of Return on Equity (ROE)
A review of BAC’s current financial ratios indicate relatively poor performance compared to top competitors and the industry average which is indicative in the relative stock prices (see below chart). Company | NYSE Symbol | ROE | ROA | Price | Bank of America Corp. | BAC | 1.76% | 0.20% | $15.56 | Wells Fargo & Company | WFC | 13.25% | 1.47% | $54.05 | JP Morgan & Chase Co. | JPM | 9.82% | 0.87% | $62.84 | Citigroup Inc. | C | 3.59% | 0.40% | $53.07 | Industry Average | 7.35% | 0.82% | |
Chart data source: http://finance.yahoo.com/
From the above data, it appears that investors in BAC’s competitors are getting a better value on their investment than BAC investors. While ROA is not the best performance indicator for the financial sector, BAC’s lower ROA indicates that investors are earning more income per dollar invested with competitors than BAC investors. In comparison to its competitors, BAC’s ROE and ROA is one of the lowest in its industry. Historically, BAC’s ROE hovered around the 16% mark, but plummeted during the financial banking crisis of 2008 reaching a low of almost -7% in second quarter 2011. BAC hasn’t been able to recover from the financial crisis primarily due to expenses in excess of $50 billion resulting from legal settlements stemming from mortgages that Countrywide initiated and sold to investors during the housing boom, without which would’ve increased BAC’s income three-fold (Rudegeair, 2015).

Chart source: http://www.stockpup.com/companies/BAC/; Accessed: 4/19/2005

Projected Future Growth Rate of Earnings
Changes in demographics in the U.S. and globally have impacted banking and investing. The combination of declining birth rates and increasing life expectancies has some experts forecasting a type of “asset meltdown” in which retirees will convert their investments to cash to consume more (Bloch, n.d.). The Board of Governors of the Federal Reserve System also note an increase in demand for online banking, “the increased role of women as business owners, and the rapid growth of minority communities’ as major shifts in demographics impacting the financial sector ("Demographic Analysis," 2009). The demand for online and mobile banking options is increasing primarily driven by Gen Y consumers entering the market Although the U.S. population is aging it is also adapting to technology and becoming emerging online banking technology users creating a major shift in banking experiences and customer demand for convenient 24hour banking access (Youngo, 2013).
Analysis of Required Rate of Return Using the CAPM Measurement
The Required Rate of Return for BAC investors is 12.08%, calculated using the CAPM Measurement as follows:
Required Rate of Return = Er=rf+ β [ErM-rf], where: rf = Risk-Free Rate = 2.11 (yield 10-yr Treasury Bond; YahooFinance; 3/10/15) β = Beta = 1.21 rM = Market Return = 10.35% (1-yr rate of return S&P 500; YahooFinance; 3/10/15)
Thus Er = 2.11 + 1.21 [10.35 - 2.11] = 12.08
Since BAC’s beta value of 1.21 is greater than 1, it indicates that BAC shares are considered cyclical stocks and are more sensitive to economic changes than average stocks (Bodie 171). Investors would expect a higher rate of return for BAC shares over the market because the stock is riskier than the average stock due to its economic sensitivity.
Intrinsic Value Using the Discount Valuation Techniques
The intrinsic stock value for BAC is $6.06, calculated as follows using the Dividend Growth Model: P0= D0 (1+g)(k-g)
Where D0 = $0.20 (annual dividend paid quarterly; http://www.dividend.com/) g = 8.50% (YahooFinance; 3/10/15) k = 12.08%, thus
P0= $0.20 (1+8.5%)(12.08%-8.5%)=$6.06
The current stock price for BAC is $15.41 (YahooFinance; 3/10/15) suggesting that the stock is currently overvalued and not a good purchase option.
Conclusion
Although the intrinsic value of BAC shares suggest that the stock is currently overvalued, BAC is a good option for a long-term investor that is willing to wait for a larger return. BAC is showing signs of recovery from the significant losses incurred during the financial crisis primarily attributable to an acquisition firm and poor timing. If not for the resulting litigation fees, BAC would’ve already shown significant ROE. While continuing to work through settlements and repay federal debt, Bank of America Corp has been focused on reinventing themselves as a digital banking experience while holding to their foundation as a “neighborhood bank”. This tactic seeks to appeal to Gen Ys to retain them as future investors making BAC a viable long term competitor. As illustrated in the below chart, although dismal, BAC’s EPS has increased ~200% in 2014 over the prior period and is forecasted to continue trending upward at ~8.5% growth. ("Bank of America Corporation," n.d.). Once all litigation has been resolved, there will be an immediate uptick in revenue earned creating a boost in stock price. How quickly these litigation matters have been resolved is yet to be seen, but for an investor that is willing to take the risk could lead to a significant return.

Chart source: http://www.stockpup.com/companies/BAC/
References
2014 Bank of America annual report. (2015, February 25). Retrieved April 19, 2015, from http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-rhome#fbid=MLUldo6AO0y
Bank of America Corporation - Company profile, information, business description, history, background information on Bank of America Corporation. (n.d.). Retrieved April 11, 2015, from http://www.referenceforbusiness.com/history2/18/Bank-of-America-Corporation.html
Bank of America Corporation (BAC). (n.d.). Retrieved April 19, 2015, from http://finance.yahoo.com/
Bank of America (BAC). (n.d.). Retrieved April 19, 2015, from http://www.dividend.com/dividend-stocks/financial/money-center-banks/bac-bank-of-america/#payout-history-summary
Bloch, B. (n.d.). Demographic trends and the implications for investment. Retrieved April 13, 2015, from http://www.investopedia.com/articles/pf/06/demographictrends.asp
Bodie, Z., Kane, A., & Marcus, A. J. (2013). Essentials of investments (9th ed.). New York, NY: McGraw-Hill/Irwin.
Demographic analysis. (2009, November 3). Retrieved April 8, 2015, from https://www.fedpartnership.gov/bank-life-cycle/topic-index/demographic-analysis
Rudegeair, P. (2015, April 16). Bank of America's financial crisis costs become a recurring nightmare. Retrieved April 16, 2015, from http://www.reuters.com/article/2014/04/16/ us-bankofamerica-results-legal-idUSBREA3F24B20140416s
Youngo, H. (2013, December 18). The top 10 trends in the digital banking industry. Retrieved April 9, 2015, from http://www.banking.com/2013/12/18/ top-trends-in-digital-banking/#.VTR2QNh0xlZ
Bank of America Corporation (BAC). (n.d.). Retrieved April 19, 2015, from http://www.stockpup.com/companies/BAC/

Similar Documents