Stocks

ModernGraham Valuation: Bank of America Corp (BAC)

moneyCompany Profile (obtained from Google Finance): Bank of America Corporation (Bank of America) is a bank holding company, and a financial holding company. Bank of America is a financial institution, serving individual consumers, small and middle market businesses, corporations and Governments with a range of banking, investing, asset management and other financial and risk management products and services. Through its banking and various nonbanking subsidiaries throughout the United States and in international markets, the Company provides a range of banking and nonbanking financial services and products through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Banking, Global Markets and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in all Other. In October 2013, Bank of America Corporation announced the completion of the merger of its Merrill Lynch & Co., Inc. subsidiary into Bank of America Corporation.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 3/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 1/3

  1. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Opinion Overvalued
Value Based on 3% Growth $4.01
Value Based on 0% Growth $2.35
Market Implied Growth Rate 25.86%
PEmg 60.22
PB Ratio 0.77

Balance Sheet – 9/30/2013 

Total Debt $255,331,000,000
Total Assets $2,126,653,000,000
Intangible Assets $75,734,000,000
Total Liabilities $1,894,371,000,000
Outstanding Shares 10,683,280,000

Earnings Per Share

2013 (estimate) $0.83
2012 $0.25
2011 $0.01
2010 -$0.37
2009 -$0.29
2008 $0.55
2007 $3.30
2006 $4.59
2005 $4.04
2004 $3.69
2003 $3.58

Earnings Per Share – ModernGraham 

2013 (estimate) $0.28
2012 $0.01
2011 $0.14
2010 $0.66
2009 $1.59
2008 $2.77

Conclusion:

Bank of America Corp is not suitable for either the Defensive Investor or the Enterprising Investor.  The company has not had stable earnings over the last five years, has not adequately grown its earnings over the last five or ten years, and is currently trading at a high PEmg ratio.  As a result, Defensive Investors and Enterprising Investors may wish to seek other opportunities, perhaps beginning with a review of ModernGraham’s valuation of JP Morgan Chase.  From a valuation perspective, the company’s drop in EPSmg (normalized earnings) from $2.77 in 2008 to an estimated $0.28 for 2013 results in a very poor intrinsic value from the ModernGraham valuation model.  The market is currently implying a growth rate of 25.86%, well above what has been seen historically (especially considering the company has seen a drop in earnings).  It would appear that Bank of America is overvalued at the current time, and value investors seeking to follow Benjamin Graham’s methods may wish to wait until the company has a better recent history.

What do you think?  Do you agree that Bank of America Corp is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Bank of America Corp (BAC) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

3 thoughts on “ModernGraham Valuation: Bank of America Corp (BAC)

  1. I feel that this valuation focuses too much on the 2008 financial crisis. Banks life BAC obviously dropped a ton back then, but most, if not all of them are now back on their feet. I feel like figures from 2008 shouldn’t be used in these kinds of valuations when they have no impact on the company now, and affect the valuations of the companies so much.

    1. That’s precisely why it is important to include figures from 2008. While all banks suffered from the crisis, not all took the same hit (see WFC and JPM). As a result, the conservative investor will look at how a bank fared during the crisis and know that if they survived that, they should be able to survive most downturns.

      1. I believe that, when looking at companies like these, the past should not be a judgment of the future. Also, the recent Fed stress test proved that all the big banks (besides Zion) would be able to survive another financial meltdown similar to 2008. Companies have learned their lessons from 2008, and its unlikely that, in the case of another crisis, that the same exact companies would underpreform again.
        P.S. I’m not saying this ti criticize your website, I actually refer to it a lot and greatly enjoy your valuations. I’m just wondering how a valuation of BAC would change if the financial crisis did not so heavily impact your valuation.

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