Bank of America: Job Growth Winner

NEW YORK ( TheStreet) -- Good news for the U.S. economy is certainly good for Bank of America ( BAC), which was the big winner among the largest U.S. financial names on Thursday, with shares rising 4.5% to close at $9.74.

During the second trading session following the New York Stock Exchange's closure for two days because of Hurricane Sandy, the broad indexes ended with 1% gains, after ADP reported that the U.S. economy added 158,000 nonfarm private sector jobs in October.

The U.S. Labor Department reported that first-time unemployment claims for the week ended Oct. 27 declined to a seasonally adjusted 363,000, com from a revised 372,000 the previous week. New jobless claims last week came in below the median forecast of 370,000, among economists polled by Thomson Reuters.

The KBW Bank Index ( I:BKX) rose 2% to close at $50.44, with all 24 index components rising for the session, except for Huntington Bancshares, which was down three cents to close at $6.37.

Bank of America's shares have now returned 76% year-to-date, following a 58% decline during 2011.

The shares trade for 0.7 times their reported Sept. 30 tangible book value of $13.48, and for 10 times the consensus 2013 earnings estimate of 96 cents a share, among analysts polled by Thomson Reuters.

Bank of America reported a small third-quarter profit of $340 million, or zero cents per share, with earnings hit by $1.6 billion in litigation expenses, from the company's settlement of a class action lawsuit related to its acquisition of Merrill Lynch in 2009.

While Bank of America's shares are trading at a significant discount to book value, the forward price-to-earnings ratio of 10 is rather pricey when compared to the other three members of the "big four" club of U.S banks:
  • Shares of JPMorgan Chase (JPM) closed at $42.84 Thursday, returning 33% year-to-date, following last year's 20% decline. The shares trade for 1.2 times tangible book value, according to Thomson Reuters Bank Insight and for just eight times the consensus 2013 EPS estimate of $5.31. While JPMorgan has traveled a rocky road this year, suspending its share buyback program during the second quarter, when it booked a $4.4 billion hedge trading loss, the company's operating return on average assets (ROA) has ranged between 0.76% and 1.01% over the past five quarters, according to Thomson Reuters Bank Insight, compared to ROA ranging from 0.06% (during the most recent quarter)to 1.08% for Bank of America. Based on a 30-cent quarterly payout, the shares have an attractive dividend payout of 2.80%.
  • Wells Fargo (WFC) closed at $34.05 Thursday, returning 26% year-to-date, following a 10% decline in 2011. The stock trades for 1.7 times tangible book value, which is no surprise, since Wells Fargo has been the best earner among the big four, with ROA ranging between 1.27% and 1.46% over the past five quarters. Wells Fargo's shares trade for nine times the consensus 2013 EPS estimate of $3.62. Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.58%.
  • Shares of Citigroup closed at $37.95 Thursday, returning 44% year-to-date, following a 44% decline during 2011. Citi trades for 0.7 times tangible book value -- same as Bank of America -- but the company doesn't face Bank of America's risk from mortgage putback claims. The shares trade for eight times the consensus 2013 EPS estimate of $4.64. Citigroup's ROA over the past five quarters has ranged between 0.10 (during the most recent quarter, when the company wrote-down its stake in the Morgan Stanley Smith Barney joint venture) and 0.77%.

With the company facing ongoing headline risk from its legacy responsibilities inherited through the acquisition of Countrywide Financial in 2008 and Merrill Lynch in 2009, it's not surprising that analysts have differing opinions on Bank of America.

FBR analyst Paul Miller rates Bank of America "Market Perform," with a $9 price target, saying on Oct. 18 that although the company's 22 cents in third-quarter operating earnings -- leaving out several one-time items -- beat his estimate of 11 cents, he expects the company's net interest margin "will continue to decline going forward as historically low interest rates weigh on industry results."

Miller said that his firm remained "comfortable on the sidelines given our concern that possible litigation expenses could largely offset the core earnings power of the company in the near term," and said that "while our estimates include approximately $300 million per quarter in mortgage repurchase provisions, we believe they could materially increase over time as potential putback risks play out." FBR estimates that Bank of America will earn 95 cents a share in 2013.

Guggenheim securities analyst Marty Mosby rates Bank of America a "Buy," with a price target of $11.50, and said on Oct. 17 after the company announced its third-quarter results that the "current discount to tangible book value represents the potential for future losses from outstanding mortgage-related overhang issues."

Mosby said that "going forward, we have calculated a range for potential remaining aftertax losses of $15-40 billion as compared to BAC's estimated current earnings power of around $10 billion a year," and that "while our best case scenario could be funded with about one year's earnings, the worst case scenario could create a haircut to BAC's tangible book value."

"We project BAC's year-end 2013 tangible book value per share to reach $14.50, which possibly could be unfavorably impacted by our worst case loss expectation of $60 billion pre-tax, or approximately a $3 unfavorable impact to tangible book value per share," Mosby said, adding that "BAC's current 30% discount to tangible book value would suggest that BAC is expected to experience close to $90 billion in future pre-tax losses."

Mosby also estimates that Bank of America will earn 95 cents a share in 2013.

BAC Chart BAC data by YCharts

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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