Bank Of America: Fair Value North Of $23
What is Bank of America (NYSE:BAC) really worth? At the end of 2014 I valued America’s largest bank at $26 per share. My valuation was based on Bank of America’s expected future free cash flows to equity (the free cash flow available to shareholders of the bank after Bank of America paid debtholders). Based on this valuation model, I derived at a fair value of $26.64 for the bank. Since Bank of America was selling for $17.68 at the time I constructed the valuation model, an investment in the bank came with ~50 percent theoretical upside.
One and a half years after my article on Bank of America was published, ‘Bank Of America: Intrinsic Value Approaching $27 Per Share, 50%+ Upside Potential In 2015’, the bank’s shares are now selling for a lower price than they did back then.
Today, Bank of America’s shares change hands for ~$15, or 65 cents on the dollar. The inconvenient truth is that an investment in Bank of America has not produced a great return at all: Bank of America’s shares have slid 5.82 percent in the last two years. I have discussed the issues that are keeping Bank of America’s shares down in my last article on the bank, ‘The Biggest Risk To Bank Of America’.
Fair Value North Of $23
I continue to think that the bank has a compelling reward/risk equation. Bank of America has great potential to grow cash flow, especially related to net interest income tailwinds once the Federal Reserve works up the courage to give interest rates a nudge.
But Bank of America is also in the bargain bin when viewed from another valuation angle other than FCF: It is priced at a wide discount to accounting book value. If we were to assume that the bank deserved to trade at accounting book value, which was reported at $23.67/share for the June quarter, Bank of America retains significant upside still: ~56 percent to be precise.
No matter how one wants to twist it, Bank of America remains a bargain, on a FCF, and an accounting book value basis. The question really is: Can Bank of America trade back up to book value?…After all, the steep discount to accounting book value has persisted for years.
See for yourself:
The answer is: Not without a helping hand from the Federal Reserve.
As long as the Federal Reserve is not willing to step up its game when it comes to raising interest rates, chances are slim at best that Bank of America will trade back up to $20. What would possibly be the catalyst?
Your Takeaway
An investment in Bank of America will continue to require a LOT of patience on the part of shareholders, while there is a significant risk that the bank’s shares will continue to sell for a discount to accounting book value and far below the FCF-based fair value estimate over the next one, two years. Bank of America should eventually sell for accounting book value, but it could nonetheless take years until we get there.
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Disclosure: I am/we are long BAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Unique Finance). I have no business relationship with any company whose stock is mentioned in this article.
