Bank of America: Strengths, Weaknesses, Opportunities, Threats

Bank of America (NYSE: BAC  ) was one of the more popular topics during Monday's live chat. That's no surprise with a 20% dive on Monday followed by a 17% bounce back on Tuesday. The stock is definitely cheap, but is it a good value? A quick SWOT -- strengths, weaknesses, opportunities, and threats -- analysis will help with the answer.

Strengths:

  • Even after Tuesday's recovery, the stock is trading at only 37% of book value and six times forward earnings estimates. That discounts a lot of risk and potential problems.
  • The company is making progress cleaning up mortgage claims and losses.

Weaknesses:

  • Countrywide. AIG's (NYSE: AIG  ) recent $10 billion claim is the latest in a long string of balance sheet whack-a-mole related to legacy Countrywide loan write-offs, claims, and settlements.
  • Puny $0.01 dividend. Regulators disapproved of Bank of America's plan for a dividend hike earlier this year.
  • The bank has posted erratic earnings for some time and has lost money over the past 12 months.

Opportunities:

  • Credit quality is steadily improving. Bank of America has had five straight quarters of decreasing net charge-offs.
  • The Federal Reserve expects to hold the funds rate at near-zero levels at least through mid-2013, which means a cheap source of funds for banks.

Threats:

  • New banking regulations could crimp income.
  • A weakening economy would threaten the improving loan quality trend.

The cheap valuation looks promising, but some other big banks also trade at low multiples.

Bank

P/E (TTM)

P/B

Bank of America

NA

0.37

JPMorgan Chase (NYSE: JPM  )

7.8

0.81

Citigroup (NYSE: C  )

9.7

0.53

Banco Santander (NYSE: STD  )

7.7

0.53

UBS (NYSE: UBS  )

6.7

0.85

Mizuho Financial Group (NYSE: MFG  )

7.3

0.59

Source: Capital IQ, a division of Standard & Poor's. P/E = price-to-earnings ratio, TTM = trailing 12 months, P/B = price-to-book ratio.

Bank of America trades at a significant discount to this group. But inconsistent earnings reports and risk of continuing claims and mortgage writedowns justify that discount. Foolish opinions on Bank of America are all over the map. Anand Chokkavelu holds the stock in his Rising Star portfolio and Ilan Moscovitz is short in his Rising Star portfolio.

Investors who buy Bank of America at these levels should do fine in the long run but should expect a bumpy ride. However, I think JPMorgan, Citigroup, and Banco Santander are better buys. Citigroup is now reporting consistent earnings. JPMorgan is one of the strongest banks in the country. Banco Santander has a great footprint in Latin America and shares are depressed by the European financial crisis. UBS and Mizuho Financial trade in value territory and warrant a closer look by investors looking for international banking exposure.

You can keep up with the news on any of the banks mentioned using our free watchlist service, My Watchlist by simply clicking on the links below.

Fool contributor Russ Krull owns shares of Citigroup, but does not have a financial position in any of the other companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase and American International Group. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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