Make Some Bank on Bank of America

NEW YORK (TheStreet) -- Bank of America (BAC) looks primed for a big run, and expectations of a 70% return over the next 12- to 18-months are hardly out of the question. Let's take a look at the numbers.

Bank of America is the most undervalued with its price to book of 0.86 times, while both JPMorgan Chase (JPM) and Wells Fargo (WFC) are fully valued at 1.14 times and 1.68 times book, respectively. 

Citigroup (C) is also undervalued at 0.77 times book but I am not a fan of the 10 to 1 reverse split the bank did in May 2011. The stock was a split-adjusted $44.16 on May 9, 2011 with the current close at $50.08 on Friday or a gain of 13.5% over almost three years for an average annual return of just 4.5%.The post-crisis high of Citigroup stock since 2009 is $55.20 set on Jan. 6, only two months ago.

Bank of America (which never split its stock) remains below its post-crisis high of $19.86 set on April 15, 2010, when much of toxicity of the mortgage mess was still on its books. The bank is much leaner, and better managed now.

It remains the second-largest bank in the U.S. based on asset size at the end of 2013. Under current CEO Brian Moynihan, who took the helm in 2010, the bank has rid itself of most of its non-performing assets (adjusted non-performing loans are 2.39% at fourth quarter of 2013, a nearly 40% improvement from just two years ago). It has taken huge write-downs which cost them earnings and settled most major litigation suites.

The balance sheet is much cleaner and earnings potential is strong given the economic improvements in the U.S. and favorable long-term-rate environment going forward, since the easing of Fed tapering which should improve margins. In fact revenues have already increased by 7% in fiscal 2013, from $83.3 billion in 2012 to $88.9 billion.

Hey, if you don't believe me, ask Warren Buffett. He made a $5 billion preferred stock purchase in August 2011 with warrants to purchase another $700 million in common stock at $7.15 a share. OK, he got a deal that you or I could not get but he made a huge bet when few others people did. The stock fell another 28% from where Buffett had the warrant price, to a post-crisis low of $5.17 in November 2011.

Here is how Bank of America gets to $30 a share: Earn $1.88 per share by the end of fiscal 2015 or a 16% premium from the current analysts' average of $1.62 for that same period, and an industry average price-to-earnings ratio of 16 times or up 11% from its current level.

So how reasonable are these assumptions and why should you bother given that the other banks in the group appear to provide returns over and above what Bank of America can offer? Let's take the first part of this question and look inside the numbers. How reasonable is obtaining a $1.88 EPS for fiscal year 2015? Of the 19 analysts that cover Bank of America, several have pegged their high estimates at $1.94 for 2015, although some do have estimates as low as a $1.50 per share.

Bank of America has beaten analysts' estimates by an average of 19% over the last five quarters, so the assumption of an EPS beat by 16% for fiscal year 2015 seems reasonable.

As for the price-to-earnings ratio I'm projecting, the current S&P 500 index P/E is 19.77 times, a discount of almost 24%, and has remained above the 16 times threshold for the last 20 months. The historical average for the S&P 500 from 1900 to 2005 was 16 times, so again the assumption seems valid. That gets us to a $30.08 share price by fiscal year 2015 (a 71% return from its current price).

Given that the bank passed its most recent Federal Reserve stress tests, they may look for a way to return excess capital and boost shareholder value with buybacks as well.

At the time of publication, the author held shares of Bank of America, Citigroup and Wells Fargo but held no positions in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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