NEW YORK (
Bank of America
shares have had a nice run-up in recent sessions, but the rally's sustainability may hinge on a presentation by CEO Brian Moynihan next week.
Much of the stock's sharp rise since the start of September has come from bullishness about the economy that has helped to boost most bank stocks. Less-horrible-than-expected jobs and housing numbers over the past couple of weeks have sent a KBW Bank Index up 11%.
Bank of America shares closed at $13.50 on Thursday, up 11% since hitting a 52-week low of $12.18 on Aug. 31. But almost any other way one slices it, Bank of America is down:
- Down 32% since hitting a 52-week high of $19.86 in mid-April.
- Down 14% since mid-July, when a dour earnings announcement wiped out a slight share-price recovery.
- Down 10% year-to-date.
- Down 21% over the past 52 weeks.
The factors weighing on Bank of America's shares are not entirely unique. Financial reform costs, market volatility and economic headwinds have sapped value from much of the industry. (Other giant money-center banks
are down between 15% and 25% since mid-April, as are
Yet the enormity of Bank of America presents higher costs and more complications in trimming down its scale and scope. With a $2.4 trillion balance sheet the Charlotte, N.C.-based banking behemoth is the largest in the country, touching one out of every three households with some type of financial service.
Economic difficulties have made the least-profitable customers a drag on BofA's bottom line, while Congress has made it difficult to target the most profitable consumers. All the while, management has had trouble boosting investor confidence that it could balance those two opposing forces.
Discussing quarterly results in July, Moynihan's team outlined, down to the dollar, how much financial regulation would impact Bank of America's credit- and debit-card businesses. But the CEO only gave vague indications of how the company would replace those dollars. He assured investors that Joe Price, who heads the consumer-finance business, was "working on it."
The closest Moynihan came to giving specifics was the following: "The mitigating actions from the revenue side are ... different types of fee structures, higher minimum balances, still charging for overdrafts and other things that occur on the check side and things like that. And then potentially new products that they're working on that will provide some of the benefits that people wanted from overdraft, prepaid debit and things like that."
provide broad details in March, but it was months before the financial-reform tussle and European debt crisis knocked the wind out of bank-stock sails.
Moynihan will be presenting at a Barclays financial-services conference in New York on Tuesday and is sure to give some kind of nod toward investors' top questions: Where will growth come from, when will it come and how will you accomplish it?
Ahead of that speech, an RBC Capital Markets analyst argued that Bank of America shares "still offer compelling value" -- just not quite as compelling.
In a report on Friday, RBC lowered its price target on Bank of America shares to $16 from $19, but continued to advise clients to buy the stock.
"We view Bank of America as one of the most compelling ideas in our coverage universe and reiterate our outperform rating," said the report, whose lead author is analyst Joe Morford.
RBC says Bank of America "should at least" trade to book value of over $21 per share, with normalized earnings of $2.30 per share. But analysts acknowledged that the stock is a play for long-term investors who have the stomach to wait out the financial-reform headwinds and skepticism regarding the new management team.
"Once BofA can outline a credible game plan for how it can generate more business out of its existing customer base, its discount multiple should narrow," said the analysts.
RBC isn't alone. Despite clients' apparent concerns about revenue growth, the vast majority of Wall Street analysts still have faith in management's ability to get the job done.
Of the 28 Wall Street analysts who cover Bank of America's stock, a dozen consider it a strong buy and nine more consider it a buy, according to
. Seven are more cautious, with hold ratings, though none suggest that clients sell Bank of America shares.
On average, analysts expect Bank of America to earn 18 cents per share this quarter and 96 cents per share for the full year on revenue of $27.3 billion and $115.7 billion, respectively. The bank is now trading 32% below the median price target of $19.75, 37% below current book value of $21.50 and 38% below forward-looking book value of $21.85 for next year. Its price-to-earnings ratio is 14.1, cheaper than most of its big-bank peers.
It's hard to say whether the current price levels indicate a huge discount, as analysts suggest, or whether Wall Street is just plain wrong. Moynihan and his team may be "working on it," but they'll have to work a little harder for Bank of America's stock to reach any of those bullish targets.
The entire Bank of America franchise is going through enormous transitions. Assets are being sold or reassessed as its strategy has narrowed from "the bank on every corner in every business line" to "the bank that's targeting select customers for select services" -- something that will undoubtedly alter book value and earnings potential in untold ways.
RBC analysts see enormous potential for Bank of America to sell new financial products to the more profitable retail banking and corporate customers it decides to keep. But they acknowledge that investors have favored stocks of smaller, sleeker companies whose management teams have given clear indications of the way forward.
"In an environment punctuated by overreaching regulators and a sluggish economic recovery, investor preference seems to move in favor of more nimble managements and those that can grow earnings through acquisition or niche business strategies," say RBC analysts.
--Written by Lauren Tara LaCapra in New York.
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