BAC - Weaknesses Offset Strengths

NEW YORK (TheStreet Ratings) -- We rate Bank of America (BAC) a "HOLD." The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks.

The company's strengths can be seen in multiple areas, such as its expanding profit margins and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally poor debt management and disappointing return on equity.

HIGHLIGHTS

The gross profit margin for Bank of America is rather high; currently it is at 61.10%. It has increasedsignificantly from the same period last year. Regardless of the strong results of the gross profit margin, thenet profit margin of -4.40% is in-line with the industry average.

Bank of America reported significant earnings per share improvement in the most recent quartercompared to the same quarter a year ago. This company has reported somewhat volatile earnings recently.But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, Bank of America reported poor results of -$0.38 versus -$0.10 in the prior year. This year, the market expects animprovement in earnings ($1.30 versus -$0.38).

Bank of America, with its decline in revenue, underperformed when compared the industry average of 6.8%. Since thesame quarter one year prior, revenues slightly dropped by 9.3%. The declining revenue has not hurt thecompany's bottom line, with increasing earnings per share.

The company's current return on equity has slightly decreased from the same quarter one year prior. Thisimplies a minor weakness in the organization. Compared to other companies in the Diversified FinancialServices industry and the overall market on the basis of return on equity, Bank of America underperformed against that of the industry average and is significantly less than that of the S&P 500.

The company, on the basis of change in net income from the same quarter one year ago, has significantlyunderperformed when compared to that of the S&P 500 and the Diversified Financial Services industry. Thenet income has significantly decreased by 541.2% when compared to the same quarter one year ago, fallingfrom -- $194.00 million to -- $1,244.00 million.

INDUSTRY ANALYSIS

The US diversified financial services industry includes a range of companies that offer financial products andservices, such as banking, insurance, and investment products. The industry is divided into threesubcategories: multi-sector holdings, specialized financial services, and other diversified financial services.

Specialized financial services companies derive a major proportion of revenue from one particular businessline. A host of specialized companies operate as credit agencies, stock exchanges, and boutique firms, whichprovide services related to credit cards, investment banking, capital markets, retail banking, assetmanagement, and insurance. Major players are Asset Acceptance Capital ( AACC) and Moody's ( MCO). Otherdiversified financial services companies provide services without any dominant business line. Thissubcategory includes Citigroup ( C) and JPMorgan Chase ( JPM). Multi-sectorholdings companies like PICO ( PICO)and Compass Diversified ( CODI) are diversified across three or more sectors, none of which contributes a majority of revenue or profit.

The industry is mature and consolidated. The Gramm-Leach-Bliley Act of 1999 facilitated the development ofdiversified financial firms through the merger and acquisition route. Consolidation has helped companiesexpand product and service lines in order to become "one-stop-shops" that cater to evolving trends and theneed for multi-channel distribution.

Although entry barriers are high, there is always the threat of substitute products because industrycompetitors do not enjoy patent or copyright protection. Product expansion has resulted in stiff pricecompetition, which has eroded margins, particularly for traditional banking services companies.

Risky lending and securitization of mortgages recently caused an increase in defaults, charge-offs, andbankruptcies. Unprecedented capital and credit market volatility following the subprime meltdown causedmassive write downs and the collapse of industry-defining institutions. Wider spreads, a higher cost ofborrowing, and more stringent credit limits have hurt industry performance. Loan origination volume hasdrastically decreased.

Population growth, advancement in information systems, emphasis on fee-based services, and improved riskmanagement are expected to play a critical role in driving future profitability.

Click here for the full Bank of American research report from TheStreet Ratings.

TheStreet Ratings is an award-winning independent research division within TheStreet network. The firm's recommendations are derived from a quantitative model that integrates multiple factors, including fundamental and technical inputs, as well as valuation factors and risk assessment. This model is supplemented by qualitative analysis from an experienced staff of analysts that provide their insight and sector expertise.

TheStreet Ratings is an award-winning independent research division within TheStreet network. The firm's recommendations are derived from a quantitative model that integrates multiple factors, including fundamental and technical inputs, as well as valuation factors and risk assessment. This model is supplemented by qualitative analysis from an experienced staff of analysts that provide their insight and sector expertise.

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