Friday, July 1, 2011

Richard Bove: B of A "Massively Undervalued"

Here's a CNBC article on what Richard Bove thinks about Bank of America (BAC).

Bove estimates that Bank of America will have pretax pre-provision earnings of $131 billion in aggregate from 2011 through 2013.

In this recent post, I said I thought the question was whether any bank was worth the trouble considering the number of other reasonably valued assets available. Many things can go wrong for even the best bank, some beyond its control, that simply cannot for other businesses.

Based upon Bove's estimate of pretax pre-provision earnings, Bank of America's after tax net income should easily normalize above $ 20 billion/year.

Current market value is $ 111 billion giving it a multiple to normalized earnings of 5.6x.

There are better banks with fewer problems and complexities out there but they sell for higher multiples of normalized earnings. I happen to like* Wells Fargo (WFC) much more over the long haul but it looks expensive by comparison at 7.5 to 8x normalized earnings.
(Wells Fargo and Bank of America obviously sell at higher current year earnings multiples as they're still absorbing credit losses and writedowns)

Best not to bottom feed when it comes to owning a bank. Banks are always on the riskier end of the investing spectrum but Bank of America is certainly more so than something like Wells in my view.

Ultimately, assuming systemic risks don't get out of hand, it comes down to whether Bank of America can avoid more capital raising (especially when the stock is cheap). 

Eventually credit losses will become more normal and loan growth will kick into gear. If Bank of America is able to absorb future writedowns, systemic risks remain reasonably in check, and it's not hurt materially by hard to predict new regulatory requirements (lots of ifs) it will, at today's prices, probably look like a bargain.

Yet with banks, unlike some other more straightforward investments, lots can always go very wrong.

Adam

Long position in BAC and WFC

* Wells Fargo has been in Stocks to Watch and the Six Stock Portfolio since the inception of both. Bank of America, an inferior bank by a large margin in my view, is not. By definition, any stock I put in either Stocks to Watch or the Six Stock Portfolio I'm willing to own for a very long time. I have established long positions in all of them at much lower prices. 
 
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