Bank of America Corp (BAC) Came Short On Earnings, Buy Shares Anyway

Citigroup’s global scope and over-expansion into foreign markets was met with some inefficiencies. In the past, Citigroup sold off certain divisions in order to improve “efficiency.” Going forward, Citigroup’s business empire will be focused on stable growth, rather than randomly opening business units in every corner of the world.

Citigroup is similar to Bank of America, in terms of having a higher P/E multiple (17.04). This is driven by the high rates of bottom line growth. Bottom line growth will be driven by cutting costs. Citigroup’s improving macroeconomic environment (declining loan loss allowances) furthers the justification for buying the stock. Analysts, on a consensus basis, anticipate Citigroup to grow earnings by 21% in fiscal year 2013.

Wells Fargo is the safety play in the peer group. Investors gravitate to the stock due to the “high-quality” management. Wells Fargo trades at a 10.58 earnings multiple because analysts, on a consensus basis, anticipate earnings growth of 9.80% for the current fiscal year. Stocks trade at lower earnings multiples when forward earnings growth is low.

Wells Fargo could cut costs further to improve earnings, but the company’s current profit margin of 23.12% is the highest it has ever been over the past five years. Earnings growth was driven by cost-cutting. There is a limit to how much a bank can cut costs before it runs out of ways to reduce the size of its expenditures. Therefore, Wells Fargo is a mature bank stock that offers an attractive dividend yield of 2.69%. Investors should anticipate stable yield growth going forward.

Conclusion

Bank of America is a deep-value investment. Analysts, on a consensus basis, forecast earnings growth of 22.30% on average for the next five years. The higher growth rates will be driven by falling costs, organic revenue growth, and share repurchases. Analysts estimate earnings per share at $0.98 for fiscal year 2013, a 292% growth in earnings over the previous fiscal year. The high multiples on earnings are more than justified, which is why I remain optimistic on the bank going forward. Any pull-back in the stock is a window of opportunity to add to the position.

The article Bank of America Missed Earnings: Buy It Anyway originally appeared on Fool.com and is written by Alexander Cho.

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