Bank Of America’s Relative Position Is Stronger Than You Might Think

goldman-sachs-1

Bank Of America’s Relative Position Is Stronger Than You Might Think

64 Views
Summary
    • The global economy shows continued potential for volatility, and income-focused investors are looking for stocks that provide additional dividend protection to safeguard against a downward correction in equities valuations.
    • Bank of America has not yet overcome its pre-COVID-19 highs (even though this has already occurred in the S&P 500), and income investors might be shunning the stock.
    • However, Bank of America's price-to-book ratio is resting in a favorable position and this suggests that BAC is actually an undervalued stock at current levels.
    • Ultimately, our valuation analysis suggests that Bank of America could be in a stronger relative position than many of those investors might think.

As the global economy shows potential for volatility after recent stock market trends, income-focused investors might now be looking for stocks that can provide additional dividend protection to help safeguard against a downward correction in equities valuations. When Bank of America (NYSE:BAC) last reported earnings, the bank's results showed earnings of $0.27 per share (at $3.5 billion), which beat analyst expectations ($0.27 per share) for the period. Revenues for the second quarter ($22.5 billion) were roughly aligned with expectations ($22 billion) and the bank's trading division offered bright points that offset some of the other negative effects coming as the result of the COVID-19 pandemic. However, Bank of America's trading division failed to match the elevated results recorded by Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM). For some income investors, this created the need for a comparative analysis amongst the most important metrics associated with each of these stocks. Ultimately, our valuation analysis suggests that Bank of America is actually in a stronger relative position than many income investors might think.

Source: Author via Tradingview

First, we must look at some of the reasons to explain why BAC has not yet overcome its pre-COVID-19 highs (even though this has already occurred in the S&P 500). Of course, these reasons might include Bank of America's quarterly decline in interest income (-11%) and an increase in reserves for credit losses ($4 billion) during the period. However, Bank of America's stock trading revenues reached $1.2 billion (a gain of 7%), trading revenues from the bond market hit $3.2 billion (an increase of roughly 50%), and fees from investment banking hit $2.2 billion (a gain of 57%), so there were still several positive elements that were contained within the report.

Source: Bank of America Form 10-Q

Additionally, Bank of America is beating its competition in key valuation metrics and this makes the stock more attractive on a relative basis. Specifically, Bank of America's price-to-book ratio is resting in a favorable position and this suggests that BAC is actually an undervalued stock at current levels. Remember, the price-to-book ratio measures market cap against book value, so if Bank of America were to liquidate assets today and pay down all debts we would be left with a figure of 0.91:

Source: YCharts

Since most of the comparisons within the industry seem to be made against the trend performances that are visible in JPM, it makes sense for income investors to assess valuations at Bank of America against those being recorded at JPMorgan Chase. Currently, shares of JPM are trading with a price-to-book value of 1.31, which is far above the metrics that are now visible at Bank of America.

Source: YCharts

As a final point of comparison, we should also take a look at recent trend performances that are visible in U.S. Bancorp which is often thought of a key industry competition in some regional areas. Currently, U.S. Bancorp is trading with a price-to-book ratio of 1.21 and this gives us another example of a major U.S. bank that is currently trading at levels above book value:

Source: YCharts

As a result of these comparisons, it becomes much more difficult to understand why shares of Bank of America stock have fallen out of favor for so many in the market. The stock is currently making an attempt to establish strong support levels above 18.80 per share but we have seen evidence of rising volatility in recent sessions and this is why investors could still see a downside break of this level before the end of 2020:

Source: Author via Tradingview

Fortunately, the stock's dividend growth metrics remain favorable and we are still seeing a five-year growth rate (CAGR) of more than 40%. Income investors are likely to remain focused on this metric because dividend growth stocks could turn out to be a primary beneficiary if recent macroeconomic trends are seen continuing for an extended period of time. Long positions in Bank of America stock are currently associated with a 2.71% dividend yield, which means that its payouts are now more attractive than those offered by Wells Fargo (NYSE:WFC) where losses are now being experienced for the first time since the 2008 financial crisis.

Source: Seeking Alpha

As the global economy continues to show potential for volatility, income-focused investors are now looking for stocks that provide additional dividend protection to safeguard against a downward correction in equities valuations. Unfortunately, Bank of America has not yet recovered all of its post-COVID-19 losses even though the S&P 500 recovered its losses in April and the benchmark is now nearing near record highs. However, Bank of America's price-to-book ratio is resting in a favorable position and this suggests that BAC is actually an undervalued stock at current levels. Ultimately, our view that Bank of America is actually in a very strong relative position when compared to critical counterparts throughout the industry. For all of these reasons, shares of BAC should still be considered a "buy" while the stock trades in the lower 20s.

Thank you for reading.

 

To get the trading signals earlier, go to our signals site to register

Or for earlier access, download the Android App at