A Bull Case for Bank of America, Wells - TheStreet

NEW YORK (

TheStreet

) -- At least one Wall Street analyst believes investors ought to be buying shares of

Bank of America

(BAC) - Get Report

and

Wells Fargo

(WFC) - Get Report

ahead of their respective earnings reports on Wednesday.

Ladenburg Thalmann's Brad Ball initiated both stocks with buy ratings this week, saying they are both cheap based on "normalized" earnings. While fourth-quarter earnings are typically weak from banks that want to get out costs at year-end to start the new year fresh, Ball believes credit costs have peaked in certain sectors and are near a peak in others. He expects banks to achieve normalized earnings in 2012, after loan losses and other crisis-related issues have abated.

Ball said Bank of America is the "least expensive" large bank stock, trading below historical norms.

Ball's price target of $23 is based on his normalized earnings estimate of $2.90 per share in 2012, which he multiplied by 7.9, a figure that is below Bank of America's average historic multiple of 11. Having closed at $16.82 on Thursday, Bank of America is now trading at a much lower multiple of 5.8.

He calculated that Bank of America is also trading "substantially below" the 10-year median of its book value multiples.

Ball cited Bank of America's "greatly enhanced business model" as a driver for earnings growth, as the Merrill Lynch and Countrywide mergers have only added to its sprawling banking empire. Repaying bailout funds has also allowed both Bank of America and Wells to remove an overhang of political uncertainty, and to have more "dry powder" from major capital raises to invest in economic growth during the recovery.

"The pieces are in place for significant outperformance," he asserted.

While Wells' stock isn't quite as cheap as its peers -- as is usually the case -- it still trades well below its own historical multiples. Ball gave the firm a $35 target price, having multiplied his $3.60 estimate for 2012 earnings by a factor of 9.7. That multiple is below Wells' average of 14 times normalized earnings from 2000 through June 2008.

Wells closed at $28.99 on Thursday.

"Wells Fargo has a track record of producing stronger revenue growth than peers throughout cycles," Ball notes. "This likely reflects its diversified business mix and operations in some of the most attractive, highest growth markets in the U.S."

Although concerns remain about Wells' loan portfolio -- especially toxic legacy assets from the Wachovia acquisition -- the company has a reputation for being a well-managed firm with tremendous profit generation, while maintaining prudent risk management. Furthermore, the merger's costs and revenue synergies are tracking ahead of schedule.

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Written by Lauren Tara LaCapra in New York