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Next Week Might Be a Good Time to Buy Bank of America

By John Maxfield - Apr 7, 2016 at 11:00AM

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If analysts are right, Bank of America's earnings report could present a buying opportunity.


Image source: iStock/Thinkstock.

If stock analysts are correct, then investors shouldn't be surprised if Bank of America's (BAC -3.08%) stock falls next week. But far from being a bad thing, I believe this would present a buying opportunity for people who sat on the sidelines earlier this year as shares of the nation's second biggest bank by assets dipped below $12.

It's widely expected that Bank of America will report lackluster results when it announces first-quarter earnings on April 14. Trading revenue is likely to be down. The same appears to be true for investment banking. Interest rates are still incredibly low, which is pressuring lending margins. And the ongoing issues in the energy industry are likely to translate into elevated loan loss provisions, which have the same impact on a bank's bottom line as higher expenses.

This is why analysts believe that Bank of America's earnings are likely to drop relative to the same period last year. The consensus estimate calls for earnings per share of $0.24 for Bank of America. That compares to earnings per share of $0.27 in the first quarter of 2015. If analysts are right, then, investors shouldn't be surprised to see the North Carolina-based bank's earnings drop by 11% on a year-over-year basis.

To put this in perspective, it would be the worst quarter for Bank of America since the third quarter of 2014, when the bank lost $0.04 per share. The cause at the time was a settlement with the Department of Justice, which reduced Bank of America's pre-tax earnings by $5.3 billion, or $0.43 per share.


Data source: Bank of America.

It would be disappointing for current investors to see Bank of America head in the wrong direction. Last year marked the first time since the financial crisis that the $2.1 trillion bank reported respectable profits in all four calendar quarters. And it was looking to gain momentum this year.

If you do the math, however, an earnings-per-share figure of $0.24 would translate into a return on assets of only 0.51% -- this assumes that Bank of America's balance sheet didn't grow or shrink by any measurable since the end of last year. That's appreciably less than the 0.74% return on average assets that Bank of America earned last year. And it's even further below Bank of America's goal, and the standard industry benchmark, of a 1% return on average assets.

I'm not pointing this out to dissuade people from investing in Bank of America. Nor am I doing so to discourage current owners of its shares, of which I am one. Quite the opposite is true.

I believe that Bank of America's shares are selling at an incredibly attractive valuation right now -- a 40% discount to book value. And Bank of America's poor performance is the reason they're so cheap. But this won't last forever. At some point, as I discuss at length here, Bank of America's fortunes will turn. And when they do, the valuation of its shares will respond in kind. Consequently, the cheaper you can buy them now, the better off you'll be later.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.88 (-3.08%) $-1.11

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