Bank of America Corp (NYSE:BAC) issued disappointing financials for the first quarter of 2013 on April 17th. Earnings per share came in at 20 cents, which missed analyst expectations of 22 cents. While this was an increase in percentage terms, it still left the bank in a questionable value situation- annualizing the 20 cent per share figure gives a P/E multiple of 14, well above that of many large banks- and Bank of America Corp (NYSE:BAC) reported a decline in revenue compared to the first quarter of 2012 as well.
The bank has been an arguable value play for some time, with the case largely resting on the fact that the stock trades at a large discount to the book value of its equity; currently, the P/B ratio is 0.6. In theory, this would limit Bank of America Corp (NYSE:BAC)’s downside- the stock should not fall too far below book value- and over time the market cap should rise (or book values be written down, or some combination of the two). Wall Street analysts had also been forecasting significant improvements on the bottom line over the next couple years as Bank of America Corp (NYSE:BAC) cut costs, with the result being a forward price-to-earnings multiple of only 9.
Citigroup Inc (NYSE:C) has a similar investment thesis to Bank of America, in that investors do not currently have much confidence in its balance sheet and so the P/B ratio is fairly low (that metric is 0.8 here). Citi reported somewhat strong numbers in the first quarter of 2013, with revenue up 10% and net income up 30% versus a year earlier. It trades at 9 times forward earnings estimates, though that figure is dependent on earnings per share being a good bit higher this year than in 2012. JPMorgan Chase combines a smaller discount to book value with the fact that it only needs to maintain its current business to prove undervalued, with a trailing P/E of 8; while revenue grew only slightly in its last quarterly report compared to the first quarter of 2012, it doesn’t need to improve by much and earnings were actually up.
We can also compare Bank of America to Wells Fargo & Co (NYSE:WFC) and to Morgan Stanley (NYSE:MS). Wells Fargo is seen as a more stable megabank, with the result being that its market capitalization is actually significantly higher than book value with a P/B ratio of 1.3. However, because Wells Fargo has been so good at generating income from these assets its current price represents a trailing P/E of only 10, and it might be worth its premium to some other banks. Morgan Stanley (NYSE:MS), a pure play investment bank, matches Bank of America’s forward P/E of 8. However, that company has been experiencing losses in some of its recent quarters and until it becomes more stable in terms of profitability we would avoid it.
Bank of America doesn’t seem like as good a buy as JPMorgan Chase, and possibly Wells Fargo & Co (NYSE:WFC) and Citigroup as well. While the book value of its equity is considerably higher than where the market is currently pricing the company, in terms of earnings it has been struggling while some of its peers have delivered stronger financial performance. Those banks might be better places to start looking for value in the financial sector at this time.
Disclosure: I own no shares of any stocks mentioned in this article.
