The Sparks That Could Light Bank of America on Fire

Even after a 2013 rally, more could be in store for Bank of America.

Jan 25, 2014 at 10:00AM

Source: Gabriel Pollard on Flickr.

Last week marked the first big bank earnings season of 2014, with all four major banks reporting earnings. A standout among the reports was Bank of America (NYSE:BAC), which beat estimates for both earnings and revenue. Going into 2014, there's upside for this megabank and a few key catalysts that could spark the shares to climb higher.

Earnings reports
Not only did Bank of America beat analyst estimates last quarter, but the results marked a sharp increase in earnings over the same quarter from the previous year. However, this cannot all be explained by growth and cost cuts. Last year, Bank of America took charge relating to a lawsuit with Fannie Mae that dealt a blow to earnings.

Despite last year's reduced earnings being largely the result of a one-time event, investors like to see solid earnings, one-time charges or not. As Bank of America settles lawsuits (more on this later), these one-time charges should become less frequent, resulting in higher earnings going forward.


The courtroom has been like a second home for B of A recently.

Life in the courtroom
Bank of America has been embroiled in legal troubles since the financial collapse as institutions and individuals seek damages for the bank's actions leading up to the financial crisis. Adding to the legal mess was Bank of America's takeover of Countrywide Financial, which caused B of A to largely assume legal responsibility for Countrywide's sketchy mortgage practices.

Bank of America CEO Brian Moynihan has taken the strategy of settling lawsuits and knocking out the bank's legal troubles as quickly as possible. Among the biggest settlements on the table is a $8.5 billion settlement with a group of plaintiffs concerning mortgage-backed securities issued by Countrywide. The settlement has already been written up, but some plaintiffs, including bailout poster child American International Group (NYSE: AIG), have objected to the settlement accusing the trustee of failing to properly perform its duties.

If the settlement is allowed to proceed, it would clear away a big chunk of uncertainty from the bank and it for the cost of only $8.5 billion.

Recent reports indicate that a ruling may be close at hand. The judge to rule on the case, Barbara Kapnick, has been promoted to the appellate division and expects to rule before taking the position next month. A decision on this settlement could be in hand in a couple weeks, clearing up a major piece of uncertainty haunting Bank of America. A positive ruling could be a major catalyst for B of A, while a negative ruling would hurt shares -- at least in the short term -- as the case goes back to litigation.


Source: Mike Schmid on Flickr.

Padding your pockets
In March, we should get a clearer picture on whether Bank of America can raise its dividend above the penny per share level. Right now, the dividend has little purpose but to attract dividend-only funds and allow the bank to say how many years in a row it has paid a dividend.

If the Fed grants Bank of America permission to raise its dividend in March, possibly to a level competitive with Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM), it could bring more buying pressure by income investors. At this moment, income investors bullish on large banks only have Wells Fargo and JPMorgan Chase to pick from, but Bank of America could join this club in the next few months, sparking another upward move in its share price.

How high?
Bank of America may have more room to run in 2014 as earnings grow, legal uncertainty dies down, and a meaningful dividend is instated. Using 2014 earnings estimates of $1.33 per share, with a 15 times multiple (multiple expansion generated through reduced legal risks) we get an end-of-year estimate of around $20 per share.

Bank of America also trades at a sharp discount to its book value. While it could be a while before B of A trades at a significant premium to book value as seen at Wells Fargo and JPMorgan Chase, the factors described above could get Bank of America to 1.0 times book. Book value stood at $20.71 on Dec. 31, 2013. If we assume a conservative 3% growth in book value for 2014, we get a year-end estimate just north of $21 per share.

Two separate valuation methods point to a 2014 year-end share price of $20 to $21 per share for Bank of America. With catalysts to move shares higher, and the potential for greater dividend income, investors have good reason to be bullish on Bank of America for 2014.

More income and less risk than Bank of America
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Alexander MacLennan is long January 2015 $20 calls on Bank of America, long Bank of America Class B warrants, and long AIG warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends American International Group, Bank of America, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, JPMorgan Chase, and Wells Fargo and has the following options: long January 2016 $30 calls on American International Group. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information