Bank of America Corp (BAC): Understanding the Upside Potential of Its Earnings Engine

Since B of A bottomed at around $3 in March of 2009, the stock has seen a high just north of $18. Today it stands around $12.35. By stemming losses just from the CountryWide assets, B of A has the potential to triple earnings for the year.

Assume first that the US economy continues on its current trajectory with positive yet sedated growth. Take 2012 earnings, rounded to $4 billion, and add back the $7 billion in losses tied to CountryWide. By simply cleaning up that portfolio once and for all, B of A could potentially triple earnings to $11+ billion. Of course there are thousands of other variables that come into play, but fundamentally this thesis is viable.

CountryWide is the driving force behind Bank of America’s woes. Clean up the CountryWide portfolio and you have a cleaned up Bank of America. The earnings, ROA, and stock price will follow.

There will almost certainly be some bumps in the road. Goldman Sachs has recently come out with a recommendation to avoid bank stocks in general in the second quarter. The dust has not fully settled on the mortgage settlement. The economy overall is still sputtering. Bank of America has one of the highest beta’s in the Dow at 1.78, making it a very volatile stock. In the short term, there is a very real risk that things could get ugly.

But avoid panic and think long term. B of A is doing everything right. Capital levels are very sound, the company did well in this year’s Federal Reserve Stress Tests, and a dividend announcement is likely not too far in the distant future. The bank’s revised business model is beginning to show a positive impact, and the income statement is poised to rebound as a result.

The volatility is your opportunity to buy.

The article Understanding the Upside Potential of B of A’s Earnings Engine originally appeared on Fool.com and is written by Jay Jenkins.