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Bank of America 'Close to Fair Value': Analyst

Stocks in this article: BAC C JPM WFC GS MS FNMA MBI

NEW YORK ( TheStreet) -- It's been quite a see-saw ride for Bank of America (BAC) and its investors.

Shares of the nation's second largest bank by total assets closed at $13.34 Tuesday, returning 15% this year, after more than doubling during 2012. Of course, last year's performance followed an epic 58% drop during 2011, so the volatility has led to a 1% return since the end of 2010.

Not so good for long-term investors, but quite a bit of fun for day traders.

Bank of America's shares now trade for 10.3 times the consensus 2014 EPS estimate of $1.29, among analyst polled by Thomson Reuters. Here's how that compares to the other five "megabanks," to use the term lovingly adopted by Senators Sherrod Brown (D., Ohio) and David Vitter (R., La):

  • Shares of JPMorgan Chase (JPM) closed at $50.23 Tuesday, trading for 8.5 times the consensus 2014 EPS estimate of $5.94.
  • Citigroup (C) closed at $50.09 Tuesday, trading for 9.4 times the consensus 2014 EPS estimate of $5.32.
  • Morgan Stanley (MS) closed at $24.37, trading for 9.6 times the consensus 2014 EPS estimate of $2.54.
  • Goldman Sachs (GS) closed at 154.52, trading for 10.1 times the consensus 2014 EPS estimate of $15.27.
  • Wells Fargo (WFC) closed at $38.76, trading for 10.2 times the consensus 2014 EPS estimate of $3.81.

Bank of America's momentum has pushed its shares so high they trade at higher forward price-to-earnings ratios than several big banks that are a whole lot more profitable. The shares have been propelled in part by several recent wins on the mortgage repurchase front, including the bank's first-quarter settlement with Fannie Mae (FNMA), its recent settlement with MBIA (MBI) and the withdrawal of most objections to its 2010 mortgage putback settlement with institutional investors.

Deutsche Bank analyst Matt O'Connor has a "hold" rating on Bank of America, and late on Tuesday raised his price target for the shares to $13 from $11, writing in a note to clients that "BAC is close to fair value relative to the market," when looking ahead to 2015 earnings.

"If we assume the S&P 500 (SPX.X) is trading at about 12.5x 2015 estimated earnings and that banks trade at a 20% discount to this (at the high end of historical levels) and market sensitives at a 10% discount to banks overall (also in line with history) this would imply a multiple of 9x," he wrote. Bank of America's shares trade for 8.6 times O'Connor's 2015 EPS estimate of $1.55.

With Bank of America seeing light at the end of its legacy mortgage putback tunnel, investors are looking for operating earnings growth. The bank is beginning to take back mortgage market share, largely lost to Wells Fargo in the wake of the credit crisis. According to O'Connor, Bank of America's "mortgage originations rose 11% in 1Q q/q vs. down slightly for peers and +12% (vs. +5%) over the past four quarters."

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