Bank of America (BAC -0.34%) has had its fair share of failures and litigation, but the bank also is an indispensable institution in the U.S. financial system.
In addition, it has severely improved its earnings quality and capability since 2011 and solved most of its most pressing legal issues, clearing the way for future business growth.
The current decline in Bank of America's market capitalization is totally unwarranted and might be a good buying opportunity for investors: With an increased discount to book value of 30% and a stronger focus on growth going forward, investors face a very attractive risk/reward ratio.
I think investors should take advantage of the comical prices Mr. Market quotes and consider an investment in one of the largest and cheapest banking businesses in the United States as long as most investors still avoid Bank of America.
Why Mr. Market is so down on the bank
A couple of weeks ago, Bank of America had to admit that it made a crucial mistake in calculating its capital base. As a consequence, Bank of America's share price retreated and now quotes at $14.51. With Bank of America down nearly 20% since its 52-week high, is the bank a buy or a Sell?
Bank of America has a market capitalization of more than $152 billion and is a pillar of the US financial system. A financial sector without Bank of America, or Citigroup (NYSE:C) for that matter, is inconceivable: these banks are too important -- not only for bankrolling corporate America, but also for regular, main street customers who need mortgages, savings and retirement products.
The financial crisis has left former intact banking franchises in shambles, and Wall Street institutions are still in the process of rebuilding their brands and their businesses.
Even six years after the financial crisis unleashed its impact on banking institutions as well as homeowners, the stock price of Bank of America remains low compared to Bank of America's intrinsic value.
First quarter earnings
For the first quarter 2014, Bank of America reported a net loss of $276 million or $0.05 per diluted share compared against a net profit of $1.5 billion or $0.10 per diluted share in the year-ago period. Analysts expected a first quarter EPS of $0.05. Though the bank has delivered a meaningful earnings miss, I think Bank of America could be a good investment for patient investors who can wait until Bank of America's market price catches up to its book value.
While Bank of America has had its fair share of setbacks, most recently it had to admit to a massive accounting mistake in calculating its capital ratios, the bank has made some remarkable progress of the years.
Systemically important institution with soaring earnings
At the end of the first quarter in 2014, Bank of America reported total assets of $2.15 trillion, making it one of the largest companies in the country.
Over the last three years Bank of America's net income has literally skyrocketed: $1.4 billion in net income in 2011 compares against net income of $11.4 billion in 2013:
An increase of more than 700% that can largely be attributed to lower loan losses and charge-offs. Bank of America's diluted EPS also reflected the improvement in earnings and soared from $0.01 in 2011 to $0.90 in 2013: A strong indicator that Bank of America has come a long way and can optimistically look forward.
Increasing book value discount
Bank of America also reported a first quarter 2014 book value of $20.75 per share, a slight improvement over last year's $20.19 and continuing the positive trend since making major changes to its business over the past few years.
A bank's book value is probably the best, though not perfect, indicator of intrinsic value for a financial firm.
The recent decline in Bank of America's share price, therefore, is a good opportunity for investors to benefit from a better risk/reward ratio and a larger margin of safety: Bank of America's discount to book value has meaningfully increased over the last month.
Shares can now be snapped up at a 30% discount to book value, making this a perfect opportunity to take advantage of the market's short-term, pessimistic outlook of a company that is making some serious improvements.
