Investors were alarmed when Bank of America Corp (NYSE:BAC) did not meet the expected $0.22 earnings per share. Instead, earnings per share were $0.21. This has spooked many investors. This is especially true considering that while Bank of America did not meet estimates, all other major banks did meet expected earnings.
Revenue was down but deposits increased. This has caused people to worry about the future value of the stock. However, I would make the case that Bank of America Corp (NYSE:BAC)’s stock is still a good value when you examine the numbers and compare the company to its major competitors.
Competitive with other banks
Though it did not meet expectations, Bank of America Corp (NYSE:BAC) saw an outcome that was similar to other large banks in the industry. Though revenue was down, Bank of America grew the bottom line. Other large banks including Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and Citigroup Inc. (NYSE:C) also did not see growth in revenue.
All of these financial institutions saw small increases or minor decreases in revenue. Investors should not be too concerned because Bank of America Corp (NYSE:BAC) has announced that it will be implementing layoffs to cut costs in order to generate earnings growth.
Bank of America, Citigroup Inc. (NYSE:C), Wells Fargo & Co (NYSE:WFC), and U.S. Bancorp (NYSE:USB) grew results at the bottom line with cost-cutting measures. Bank of America Corp (NYSE:BAC) had 550% year-over-year growth (from $0.03 to $0.20 per share), the highest EPS growth among all major banks. By contrast, Citigroup saw 31% growth and Wells Fargo came in a 22%. U.S. Bancorp (NYSE:USB) only saw 7.5% growth. You can see that Bank of America performed well compared to its peers in this category.
Stability in the banking business
Fortunately for the major banks, it would seem that the financial markets are starting to stabilize. It helps that large banks have not had any major issues with litigation recently. Reduced legal costs help growth at the bottom line.
Bank of America saw a $1 billion decline in expenses this year. Loan losses were down nearly 1%, and charge-offs were down nearly 0.8% compared to last year. These factors all contributed to growth. Bank of America also plans to cut expenses by $8 billion before 2015. All this indicates a bright future of earnings growth at Bank of America.
There is more good news for the banking industry. The housing market is recovering, so large banks should start to see more home loans. This is based on recent new-home construction figures. Thus, banks will benefit from interest generated by these new loans. This will help boost revenue for all of the major banks, including Bank of America.
Comparing banks
JPMorgan Chase & Co. (NYSE:JPM) is an interesting case because it is currently undervalued. JPMorgan has the smallest P/E among large banks, which is attractive to investors. However, it has seen instability in the credit markets recently. In the past, the company has shown that it has issues with handling risk portfolios. That has left investors leery of the stock. For these reasons, the stock is heavily undervalued. Because of the low P/E, this could still be a good investment.
However, you must have patience the to wait for the stock to return to a normal value. This stock could be a good investment. I estimate that JPMorgan should be trading at approximately 12 times earnings. In my opinion, the stock will eventually recover. If you are looking for more of a long-term investment in a bank stock, I think JPMorgan is a good value for the price.
Citigroup has seen problems related to its expansion into international markets. Its expansion was poorly planned, poorly managed, and resulted in a lot of inefficiencies. As a result, Citi has already sold several divisions internationally to help improve its bottom line. It is now looking to build its business based on more stable growth principles. It will be taking a smart approach to global expansion instead of trying to open too many branches in too many new places all at once.
Citigroup and Bank of America have a similar forward looking P/E ratios because both companies have seen excellent growth at the bottom line due to cost-cutting measures. Analysts estimate that Citigroup will see 22% growth this year. Another positive for Citigroup is that it has been seeing fewer losses from loans. Those are both really great reasons why I can recommend the stock.
Wells Fargo’s stock is usually the safest bet and many investors are attracted to the firm because it has a reputation for being well managed. This is something that investors are commonly looking for when choosing a stock. The company’s P/E is lower since it is only estimated to see 8% growth this year.
While Wells Fargo might consider reducing costs, its profit margin is still 23%. Due to the decent profit margin, additional cost-cutting measures aren’t really necessary. Especially when you consider that the profit margin is the largest it has been in the last five years. There isn’t really concern there as far as growth is concerned.
Wells Fargo has already been through cost-cutting measures to achieve earnings growth numbers. Companies can’t cut costs indefinitely, and Wells Fargo has pretty much been through all the cost-cutting measures it can take for now. Thus, Wells Fargo’s stock is stable with a 3% dividend, which is very attractive to investors. Analysts are predicting stable growth for Wells Fargo in the future. Thus, I believe that it would be a solid investment.
The bottom line
Despite the missed earnings, I believe that Bank of America has an undervalued stock. Earnings will increase by 24% in five years. It will achieve this growth through cuts in cost, growth in revenue, and by repurchasing shares. Based on this, it looks like the company is on the right track. According to analysts, per-share earnings will increase almost 275% this year.
I think the facts show that the high earnings numbers are justified, so I’m still optimistic. That’s why I recommend Bank of America stock. Depending on what you are looking for, any of the four major banks could be a sound investment.
The article Comparing Bank of America to Other Major Banks originally appeared on Fool.com and is written by Nauman Aly.
Nauman is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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