Bank of America 'Close to Fair Value': Analyst

NEW YORK ( TheStreet) -- It's been quite a see-saw ride for Bank of America ( BAC) and its investors.

Shares of the nation's second largest bank by total assets closed at $13.34 Tuesday, returning 15% this year, after more than doubling during 2012. Of course, last year's performance followed an epic 58% drop during 2011, so the volatility has led to a 1% return since the end of 2010.

Not so good for long-term investors, but quite a bit of fun for day traders.

Bank of America's shares now trade for 10.3 times the consensus 2014 EPS estimate of $1.29, among analyst polled by Thomson Reuters. Here's how that compares to the other five "megabanks," to use the term lovingly adopted by Senators Sherrod Brown (D., Ohio) and David Vitter (R., La):
  • Shares of JPMorgan Chase (JPM) closed at $50.23 Tuesday, trading for 8.5 times the consensus 2014 EPS estimate of $5.94.
  • Citigroup (C) closed at $50.09 Tuesday, trading for 9.4 times the consensus 2014 EPS estimate of $5.32.
  • Morgan Stanley (MS) closed at $24.37, trading for 9.6 times the consensus 2014 EPS estimate of $2.54.
  • Goldman Sachs (GS) closed at 154.52, trading for 10.1 times the consensus 2014 EPS estimate of $15.27.
  • Wells Fargo (WFC) closed at $38.76, trading for 10.2 times the consensus 2014 EPS estimate of $3.81.

Bank of America's momentum has pushed its shares so high they trade at higher forward price-to-earnings ratios than several big banks that are a whole lot more profitable. The shares have been propelled in part by several recent wins on the mortgage repurchase front, including the bank's first-quarter settlement with Fannie Mae ( FNMA), its recent settlement with MBIA ( MBI) and the withdrawal of most objections to its 2010 mortgage putback settlement with institutional investors.

Deutsche Bank analyst Matt O'Connor has a "hold" rating on Bank of America, and late on Tuesday raised his price target for the shares to $13 from $11, writing in a note to clients that "BAC is close to fair value relative to the market," when looking ahead to 2015 earnings.

"If we assume the S&P 500 ( SPX.X) is trading at about 12.5x 2015 estimated earnings and that banks trade at a 20% discount to this (at the high end of historical levels) and market sensitives at a 10% discount to banks overall (also in line with history) this would imply a multiple of 9x," he wrote. Bank of America's shares trade for 8.6 times O'Connor's 2015 EPS estimate of $1.55.

With Bank of America seeing light at the end of its legacy mortgage putback tunnel, investors are looking for operating earnings growth. The bank is beginning to take back mortgage market share, largely lost to Wells Fargo in the wake of the credit crisis. According to O'Connor, Bank of America's "mortgage originations rose 11% in 1Q q/q vs. down slightly for peers and +12% (vs. +5%) over the past four quarters."

The company's prospects for its Merrill Lynch subsidiary look bright, with management indicating in a recent meeting with O'Connor that the expansion of profit margin for its wealth management business was continuing in the second quarter.

Bank of America is also, like most banks, focusing on cutting expenses. The bank expects its "Project New BAC" to lead to annual cost savings of $1.5 billion by the end of 2014, although O'Connor wrote that many investors "assume a more meaningful decline in core costs over the next few quarters."

"From here, BAC shares should perform in line/slightly better than banks overall so long as the macro/monetary policy theme continues and/or cap markets revenue are better than expected," O'Connor wrote.

BAC Chart BAC data by YCharts

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

-- 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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