Mutascio maintained his price target of $13.50 for Bank of America's shares. "Our thesis on BAC has been that potential litigation and loan put-back costs would not cause a capital raise or a material decrease in tangible book value per share," he wrote. "At this level we think the 'easy money' has been made and the next material leg up in the shares will be predicated on several positive factors all coming together." Looking back, Bank of America has turned out to be an amazing play for investors who went in two years ago, when the company's efforts to work through an avalanche of mortgage loan repurchase claims from investors turned the shares into hot potatoes. Investors' confidence in Bank of America's prospects is soaring, with the company making very significant strides in its efforts to put the legacy of its disastrous purchase of Countrywide Financial in 2008 behind it. Recent mortgage repurchase wins have included a massive first-quarter settlement with Fannie Mae ( FNMA), the groundbreaking settlement with MBIA ( MBI) and the withdrawal of most objections to its 2010 mortgage putback settlement with institutional investors.
Of course, the $8.5 billion settlement with institutional investors -- agreed upon by Bank of America and Bank of New York Mellon as trustee in June 2010 -- isn't yet a done deal, with American International Group ( AIG) continuing to hold out for a better settlement. But Bank of America has been moving aggressively, so it would not be surprising to see an agreement with AIG in the near term. The icing on the cake is that Bank of America set aside reserves for the settlement two years ago.
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Looking forward, investors are expecting Bank of America to achieve very significant cost savings as mortgage loan quality continues to improve, repossessed property inventory declines and loan servicing staffs are trimmed. Investors expect additional efficiencies through the company's "Project New BAC" cost-cutting program. Mutascio estimates that Bank of America can eventually hit $1.80 a share in "normalized" annual earnings, however, he sees the market currently "applying no material discount to the P/E multiple applied to the normalized EPS earnings, regardless of the time that it takes to achieve." "We are unwilling to use BAC's potential normalized earnings power for a basis of valuation without at least discounting the P/E multiple applied to those earnings for the years we think it will take to get there and the uncertainty of the company's ability to achieve them," Mutascio wrote. "Using this method, we could potentially see a fair value of $14.50 (applying a discounted multiple of 8.0x for timing to normalization and uncertainty of achievability to $1.80), which still would not represent enough upside to warrant an Outperform rating." BAC data by YCharts
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-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn