Why Bank of America Is Plunging

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Despite Bank of America's (NYSE: BAC  ) announcement of expectations-beating earnings this morning, shareholders weren't exactly elated. After temporarily rising, shares ultimately sold off almost 5% by market close.

Why? Reported earnings for complex too-big-to-fails truly are an enigma wrapped in a fiction. Perhaps as much as any other industry, earnings per share at massive financial institutions are affected by so many one-time events and subjective modeling on a quarter-to-quarter basis that they alone can't tell the whole story.

Although B of A has indeed been improving thanks to better credit quality and lower expenses, and its latest quarter now makes the Dow (INDEX: ^DJI  ) eight for eight in earnings beats, there still are a number of areas that give B of A investors pause.

The bulk of this quarter's earnings improvement came from reduced mortgage banking losses and the lack of writedowns and legal settlement costs this quarter. But it's unlikely that the bank's mortgage troubles are completely behind it even after the company has set aside $35 billion to cover bad mortgages and put-back requests on mortgages that Fannie, Freddie, and private investors like BlackRock, PIMCO, and AIG (NYSE: AIG  ) have accused it of improperly underwriting. B of A isn't the only underwriter in hot water, but its acquisitions of Merrill Lynch and basket case Countrywide gave it more exposure than Wells Fargo (NYSE: WFC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase.

Bank of America is also continuing to suffer from the same sorts of top-line problems that have been plaguing much of the banking industry. Low interest rates, regulatory crackdowns, and the bursting of the finance bubble have meant less revenue for the sector.

That being said, at a price-to-book multiple of 0.6 and forward P/E of 10.6, the stock isn't exactly priced as though the behemoth will return to its prior level of profitability. That means there could be significant upside over the long term if the company is able to partially right itself.

If you want to know more about Bank of America, make sure to stay up to date with the latest analysis on the bank. You'll find it in our brand-new premium research report, which includes a comprehensive view of the opportunities and threats facing the global bank as well as a full year of updates to go with it. Get your report on Bank of America today.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of JPMorgan Chase and Bank of America. Motley Fool newsletter services have recommended buying shares of BlackRock, Wells Fargo, and AIG. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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  • Report this Comment On July 19, 2012, at 4:30 PM, lenglish2 wrote:

    I've been wanting to ask this for a while now, particularly with BofA: how does one factor in dilution to the buy/not buy calculation? BofA has twice number of shares outstanding from 3 years ago, over 10 BILLION!

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