I have to say it is pretty disastrous across the board in Bank of America Corp. There is no sign of improvement anywhere except a slightly downward delinquency ratio in loans and mortgages. Net interest margin got compressed to 2.32%, which is at a very dangerous level. With the operation twist from the Fed in place, I can see no improvement on net interest margin going forward.
Fire sale of China Construction Bank stake, accepting unfavorable term on capital raised from Berkshire Hathaway, fail to raise fees on debit card transaction, capital raise at fire sale stock price to repay subordinate debt are all negative signs of the health in BAC. In addition, negative press is keep coming to haunt the bank.
Despite all these negatives, I believe BAC still has a wonderful retail franchise. The chance of bank failure is remote giving its stronger capital position now. However, I would use a much more conservative stands to valuate the stock to make me comfortable in buying its shares.
Valuation
The CEO is not as reliable as I first thought in here. I have to start my number from somewhere, so I still start from the 45 billion pre-provision pre-tax number he suggested. Then I add my 20% cut for safety margin and10 billion provision that gives pre-tax income estimate of 45*0.8-10 = $26 billion. With tax rate of 35%, that gives net income of $16.9 billion. After deducting 1.2 billion in preferred dividend, that gives net income for common shareholders $15.7 billion. I would use 11 billion diluted shares as my estimate for 2014. That gives my estimate of 2014 earning per share at $1.427. I use 9 times earning as the fair valuation because BAC will probably need to allocate a little of its earning to strengthen its capital even after 2014. That gives fair value of BAC in 2014 at $12.843 per share. My required return on BAC is changed to 19% since it has significant risk involved. Discounted this required return 3 times due to the fact that today is in 2011. The fair value and my buy limit of bac is $7.62 per share. I would be extremely comfortable buying the shares below this price.
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I have a website where I give advise on penny stocks and stocks under five dollars. I would like to comment about warren buffetts holding company berkshire hathaway investing in BYD auto company. This does not seem like the sort of thing that warren buffett generally invests in warren generally invests in fairly solid safe companies.
ReplyDeleteI have been hearing bad things about bank of america. I think many of the large money center banks are going back to their old tricks.
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