Hey, if you don't believe me, ask Warren Buffett. He made a $5 billion preferred stock purchase in August 2011 with warrants to purchase another $700 million in common stock at $7.15 a share. OK, he got a deal that you or I could not get but he made a huge bet when few others people did. The stock fell another 28% from where Buffett had the warrant price, to a post-crisis low of $5.17 in November 2011.
Here is how Bank of America gets to $30 a share: Earn $1.88 per share by the end of fiscal 2015 or a 16% premium from the current analysts' average of $1.62 for that same period, and an industry average price-to-earnings ratio of 16 times or up 11% from its current level.
So how reasonable are these assumptions and why should you bother given that the other banks in the group appear to provide returns over and above what Bank of America can offer? Let's take the first part of this question and look inside the numbers. How reasonable is obtaining a $1.88 EPS for fiscal year 2015? Of the 19 analysts that cover Bank of America, several have pegged their high estimates at $1.94 for 2015, although some do have estimates as low as a $1.50 per share.
Bank of America has beaten analysts' estimates by an average of 19% over the last five quarters, so the assumption of an EPS beat by 16% for fiscal year 2015 seems reasonable.
As for the price-to-earnings ratio I'm projecting, the current S&P 500 index P/E is 19.77 times, a discount of almost 24%, and has remained above the 16 times threshold for the last 20 months. The historical average for the S&P 500 from 1900 to 2005 was 16 times, so again the assumption seems valid. That gets us to a $30.08 share price by fiscal year 2015 (a 71% return from its current price).Given that the bank passed its most recent Federal Reserve stress tests, they may look for a way to return excess capital and boost shareholder value with buybacks as well. At the time of publication, the author held shares of Bank of America, Citigroup and Wells Fargo but held no positions in any of the other stocks mentioned. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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