Bank of America: An Inflection Point

07/28/2015 8:00 am EST

Focus: STOCKS

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

This featured buy recommendation is one of the largest financial companies in the world; this leading bank is also the nation’s largest credit-card lender, the country’s largest mortgage company, and a top-tier securities firm, explains Stephen Biggar of Argus Research.

Bank of America (BAC) reported 2Q15 earnings of $0.45 per share, up from $0.19 a year earlier.

Excluding earnings of $0.07 per share from nonrecurring items, adjusted EPS of $0.38 beat the $0.36 consensus forecast and our $0.32 estimate.

Results were impressive on several fronts, with BAC surprising on the upside after missing consensus estimates in three of the last four quarters.

We believe this banking franchise has hit an inflection point. We expect the progress seen in 2Q to boost investor confidence in the company’s near- and medium-term earnings prospects.

Given that the current dividend yield is well below the peer average (due to the Fed’s need for a greater capital buffer), we believe that more flexibility on capital returns will also boost investor interest in the stock.

Our dividend estimates are $0.20 per share for 2015 and $0.30 for 2016. BAC has noted its desire to return to a 30% payout ratio, but did not provide a time frame.

Under the conditional Fed approval, the company repurchased 49 million shares for $775 million and paid $500 million in common dividends in 2Q15.

The company has made substantial progress in reducing legacy-related mortgage costs and high litigation costs. It is also positioned to deliver higher net interest income once rates start to move higher.

If BAC continues to make progress on cost initiatives and takes advantage of recent franchise investments, we believe the potential earnings upside is greater than at other large banks that are already operating more efficiently.

At 12-times our 2015 EPS estimate and 1.2-times tangible book value, BAC appears attractively valued relative to other large-cap banks.

We are raising our rating on Bank of America from Hold to Buy. We note that the shares have traded as high as $54 in the pre-crisis era, when earnings were at their peak. Our target price of $20 assumes a multiple of about 14-times our 2015 estimate.

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