Is Bank of America Cheap According to Graham?

Earlier this year, I spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5 and finally, take the square root. The result, in dollars, is the Graham number.

However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that, in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15, and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that met the ideal situation mentioned above. Currently, there are 68 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them to competitors, and their current value in relation to their Graham numbers. Up next is megabank Bank of America (NYSE: BAC  ) .

Who are they?
Bank of America is one of the most traded stocks in the market, and is currently home to over $2 trillion in total assets. It has taken a much more quiet approach as of late, especially considering the debacle of last year, relating to its planned $5 debit card fee. This new policy hasn't kept the bank completely out of the news, with rigged bids in the municipal bond market coming to light late last month. Nevertheless, the bank's stock performance hasn't disappointed of late, trading for almost twice its 52-week low.

What's it worth?
Bank of America has the most upside of all the "too big to fail" banks, with Citigroup (NYSE: C  ) not too far behind. Royal Bank of Canada (NYSE: RY  ) , the largest Canadian bank, is also included due to its comparable size:

Company

EPS (ttm)

Book Value Per Share (mrq)

Graham Number

Recent Price

Upside

Bank of America $0.91 $20.16 $20.32 $9.03 125.0%
Citigroup $3.45 $62.61 $69.71 $32.66 113.5%
JPMorgan Chase (NYSE: JPM  ) $4.33 $48.41 $68.68 $39.60 73.4%
Wells Fargo (NYSE: WFC  ) $3.02 $26.06 $42.08 $34.15 23.2%
Royal Bank of Canada $3.78 $27.14 $48.04 $57.36 (16.2%)
Source: Yahoo! Finance and author's calculations

BofA is trading at a huge discount to its Graham value, but a couple of caveats are in order. The company is battling lawsuits stemming from the mortgage bust and its disastrous Countrywide acquisition. And, keep in mind, that of its $20.16 in book value per share, some $6.94 is intangibles, mostly goodwill from BofA’s acquisitions.

Despite trading at such a steep discount to its Graham valuation, not all is rosy at Citigroup. It recently settled a class-action suit relating to misleading shareholders about its exposure to subprime mortgage debt. JPMorgan has had its own problems during the past couple of months, with the revelation of the "London Whale," and his loss of close to $6 billion.

Wells Fargo, a favorite of the world's most famous investor, was punished by the SEC for shenanigans regarding mortgaged-backed securities, though the $6.5 million in damages pales in comparison to damages paid by contemporaries Citigroup and JPMorgan. Finally, despite currently trading well above its Graham valuation, Royal Bank of Canada boasts a dividend yield of 4.2%, thanks to a recent dividend increase. It is also looking into bidding on some Bank of America assets to expand its global reach, which could net B of A around $3 billion.

Accountability time
A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. I already have a green "thumbs up" over on my CAPS page for Bank of America, so I will be maintaining this rating. I'll also be adding Bank of America to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.

If you want an in-depth look at Bank of America, we have a new premium report that outlines key opportunities and risks facing the bank, and the report comes with a full year of updates. Click here to sign up for the report today!

Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Wells Fargo, Bank of America, JPMorgan Chasse and Citigroup. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not 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.


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