Bank of America Soars as Sector Stalls

NEW YORK (TheStreet) -- Bank of America (BAC) was the sector winner during Thursday's rather weak first trading session of 2014, with shares rising 3.4% to close at $16.10.

Bank of America was upgraded to a "buy" rating by Citigroup analyst Keith Horowitz, who also raised his price target for the shares to $19 from $16, based on his 2015 earnings estimate of $1.65 a share.

The Dow Jones Industrial Average pulled back 0.8%, while the S&P 500 was down 0.9% and the NASDAQ Composite dipped 0.8%, after the Institute for Supply Management said its national Purchasing Managers Index (PMI) for December came in at 57.0%, which was a slight decline from 57.3% in November, but was also the second highest PMI reading during 2013.  A reading above 50 indicates expanding manufacturing activity.  ISM said manufacturing activity in the United States had expanded for seven straight months.

ISM's New Orders Index rose to 64.2% in December from 63.60% the previous month.  The December number was the highest since April 2010.

A "robust appetite" for cars and trucks is a major factor in the strong U.S. manufacturing numbers, "while a positive and improving housing market is supporting demand for building materials," according to Sterne Agee analyst Lindsey Piegza. "Going forward, positive expectations for growth overseas will further bolster U.S. orders in the new year," Piegza wrote in a client note on Thursday.

Also on Thursday, the Department of Labor said initial unemployment claims in the U.S. declined by 2,000 to a seasonally adjusted 339,000 for the week ended Dec. 28.  Economists polled by Thomson Reuters had expected new claims to come in at 339,000.  The four-week average for unemployment claims rose to 357,250 from a revised 348,750 the previous week.

The fourth quarter of 2013 saw a slew of positive economic reports, causing the Federal Reserve to begin pulling back on its "QE3" purchases of long-term bonds, putting additional upward pressure on long-term interest rates.  Deutsche Bank chief U.S. economist Joe LaVorgna on Tuesday predicted U.S. gross domestic product growth would accelerate to 3.5% in 2014 from an estimated "near 3%" during 2014.

In a note to clients, LaVorgna also predicted, "The unemployment rate will fall below 6.5% by the end of next year and much lower if unemployment benefits are not extended."  That's a magic number for banks, since the Federal Open Market Committee has repeatedly said the short-term federal funds rate -- stuck in a target range of zero to 0.25% since late 2008 -- was unlikely to be raised until the unemployment rate drops below 6.5%.  The November unemployment rate was 7.0%, improving from 7.3% in October.  Most banks are positioned to benefit significantly from a parallel rise in interest rates.

The KBW Bank Index (I:BKX) on Thursday fared better than the broad market, pulling back 0.5% to 68.95, however, all but five of 24 index components ended with declines. 

Bank of America and JPMorgan Chase

Shares of Bank of America returned 34.5% during 2013, after more than doubling during 2012.  The shares trade for 1.2 times their reported Sept. 30 tangible book value of $13.62, and for 10.1 times the consensus 2015 earnings estimate of $1.59, among analysts polled by Thomson Reuters.  The consensus 2014 EPS estimate is $1.32.

In his U.S. large-cap bank and broker preview for fourth-quarter earnings on Thursday, Horowitz of Citigroup wrote that his upgrade of Bank of America reflected "a cost of equity more in line with history and no longer impacted by legacy issues."

"We believe BAC has built-in earnings drivers on the cost side which puts us slightly ahead of consensus. Also, if US economy continues to improve, we believe investors will look to BAC (as well as JPM) as a play on the US economy due to an asset sensitive balance sheet and exposure to the US consumer."

Horowitz had already rated JPMorgan Chase JPM a "buy," but on Thursday raised his price target for the shares to $72 from $66, "to better reflect a cost of equity more in line with history," as the company moves past a slew of regulatory penalties, including its landmark $13 billion mortgage-backed securities settlement with the Department of Justice and other government authorities.

JPMorgan's shares rose 0.2% to close at $58.21.  The stock returned 37% during 2013, following a 36% return during 2012.  JPMorgan's shares trade for 1.5 times their reported  Sept. 30 tangible book value of $39.51, and for 9.1 times the consensus 2015 EPS estimate of $6.37.  The consensus 2014 EPS estimate is $6.00.  Based on a quarterly payout of 38 cents, the shares have a dividend yield of 2.61%.

The following chart shows the performance of Bank of America and JPMorgan Chase against the KBW Bank Index and the S&P 500 over the past 12 months:

BAC Chart data by YCharts


-- 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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