B of A Wants Uncle Sam Out -- Should You Get In?

Bank of America (NYSE: BAC  ) wants the government out of its capital structure (and, by extension, its affairs), and it wants to start Uncle Sam on its way by repaying the $20 billion in direct aid it received as an incentive to close the Merrill Lynch acquisition. As B of A prepares a government exit, should investors take the entrance door by picking up some of the bank's common shares?

Bank of America -- unplugged
A first repayment of TARP monies would be significant in helping B of A catch up with peers JPMorgan Chase (NYSE: JPM  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley (NYSE: MS  ) , who have already returned the government's investments.

Having the government on board could well act as an anchor on the business … and the stock. As Bank of America CEO Ken Lewis told Bloomberg TV in a May interview: "Every institutional investor that we talk to says that you're not going to realize the full value of your stock until you get the government out and you don't have that threat of them doing something or running your business."

Short-term catalyst vs. long-term value
Will the government's exit act as a short-term catalyst for the stock? Perhaps, but I don't think that's a bet worth making; after all, the stock has already rallied nearly 600% from its March low, as the fear of a wholesale government takeover has receded.

A better reason to consider buying the shares is that they don't look absurdly expensive on the basis of their normal earnings power. As the following table indicates, as investors with a multi-year time horizon look beyond current-year earnings, the numbers start making a lot more sense:

Company

P/E (Current Fiscal Year)

P/E (Current Fiscal Year + 1)

P/E (Current Fiscal Year + 2)

Bank of America (NYSE: BAC  )

29.5

18.0

7.5

Citigroup (NYSE: C  )

-

37.9

13.6

JPMorgan Chase (NYSE: JPM  )

26.1

14.4

8.9

US Bancorp (NYSE: USB  )

25.7

15.7

10.9

Wells Fargo (NYSE: WFC  )

16.5

16.0

8.8

Source: Capital IQ, a division of Standard & Poor's.

Last thoughts
All the same, this is no "high conviction" recommendation: First, at similar valuations (from the next fiscal year on out), I prefer Wells Fargo and JPMorgan Chase to B of A. Second, since I expect a broad correction in U.S. stocks, I think investors will get other opportunities to pick up bank shares at better prices over the next 12 to 24 months.

Jeremy Grantham's firm, GMO, is forecasting that "high-quality" U.S. stocks will beat large-cap stocks by more than six percentage points annually over the next seven years! Morgan Housel has identified three high-quality companies that are still cheap.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 02, 2009, at 12:25 PM, plange01 wrote:

    anyone interested in buying stocks should be in bac and c already....

  • Report this Comment On September 02, 2009, at 7:15 PM, TxTom wrote:

    Calculations, calculations. All meaningless when you consider that the bank stocks will inevitably go up and there's nothing that anyone can say that will prevent that from happening.

    The economy is getting better despite the naysayers, and bank stocks will all attract investors until they reach at least book value, and probably beyond. Buy in or stay out, but don't gripe if you don't own them.

    And I agree, anyone interested should already own financials. 400% ago would have been nice. But there is more to go. So.....

    Happy investing!!!

  • Report this Comment On September 02, 2009, at 11:07 PM, rd80 wrote:

    Ken Lewis has been saying BAC will buy back the TARP preferred for some time now. All the talk about paying back TARP misses a critical element - where are they going to get the money to do it?

    Believe it when you see it.

  • Report this Comment On September 04, 2009, at 4:52 PM, multi007 wrote:

    I own BAC. With that said, Ken Lewis has been saying he will repay tarp before he leaves (forced out). I for one would prefer they NOT pay back tarp for several years as commercial real estate is still unrealized and has not been written down. Further, BAC credit card loses continue to increase, albeit slowly. Repayment of tarp to early may be the cause of BAC capitalization to come under scrutiny by the powers that be. All I can say is, thank goodness they cant repay it without the permission of the powers that be. Im sure they will doa colonic on BAC before tey even accept it.

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