Should You Believe the Hype About Bank of America?
Nov 21st 2012 12:00PM
Updated Nov 21st 2012 12:04PM
Suddenly, it seems, Bank of America (NYS: BAC) is everybody's darling. Ever since CEO Brian Moynihan trumpeted the bank's new and improved capital cushion, it seems, the accolades have been rolling in. Earlier this month, ISI Group upgraded the bank from Hold to Buy. Now, analysts at Stifel Nicolaus have done the same, throwing in a lofty $11 price target, not seen since one year ago July.
I'm the first to admit that I have mixed feelings about the TBTF galoot. On the one hand, I admire the hard work that has been done on CEO Moynihan's part, to good effect, in a very short time span. But I also worry about the core of the company, which is currently being propped up by cuts at the same time it is being undermined by Countrywide.
An upgrade based on temporary factors
The Stifel upgrade is good news, but its basis leaves a bit to be desired. While opining that Bank of America is set to see EPS growth of 30% for 2014 compared to its peers' measly 5%, the reason for this happy-go-lucky prediction is grounded in the fact that B of A, unlike other big banks, still has fat to trim.
Indeed, that increase seems a little bloated. As fellow Fool Rich Smith points out, most analysts have pegged the bank's growth at more like 7.8% over the next five years, in line with its two closest competitors, JPMorgan Chase (NYS: JPM) and Wells Fargo (NYS: WFC) . Two years into Project New BAC, does the bank really have that much more slimming to do?
Meantime, Countrywide continues to be a pain in the balance sheet. As my Foolish colleague John Maxfield notes, those nasty legacy loans have cost the big guy $105 billion in charge-offs in the last few years -- and, despite management's claim that investor lawsuits regarding put-back requests are mostly provided for, such demands increased by $15 billion this year, to $25 billion, compared to 2011. Of that amount, nearly $5 billion were received in the third quarter.
One Fool's take
Is Bank of America set to soar? Perhaps, as analysts say, the cuts will continue to pad the bank's bottom line, as well as its capital cushion. But that scenario can't go on forever, and it seems unfair to lead investors down a path that can't be maintained over the long haul. And, even though Stifel expects B of A to pass the 2013 stress tests and begin paying more robust dividends, there needs to be a strong plan in place to keep new revenue flowing. In that respect, both Wells and JPMorgan have been having good luck with the mortgage side of the business, unlike B of A.
Moynihan recently stated that Bank of America's business model works, and is the "best...we can bring." At the same time, he notes that the Countrywide issue is still a problem, and earnings need to ramp up. Though he mentions the bank's mortgage and investment-banking businesses, he doesn't really delineate a plan to create those new earnings. To me, that is just a little too scary -- and I think investors would do well to be a bit nervous, as well.
That's not to say that B of A is down for the count -- in time, there's a good chance that the bank will find its way. Until then, why not prepare for its eventual recovery? To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.
The article Should You Believe the Hype About Bank of America? originally appeared on Fool.com.Fool contributor Amanda Alix has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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