Bank Of America’s Stock Is Likely To Thrive In The Current Environment – Bank of America Corporation (NYSE:BAC)

Bank of America (BAC) has been performing well recently. The company exceeded revenue estimates for the past 2 quarters and exceeded earnings estimates for the past 5 quarters. This gave the stock positive momentum over the past year. I expect the stock to outperform the S&P 500 over the next year as the company continues to grow earnings at a double-digit rate from a lower than average valuation.

Bank of America to Thrive in the Interest Rate Increase Cycle/Economic Expansion

Bank of America is likely to perform well during this phase of the interest rate increase cycle. The company is likely to benefit from incremental increases in net interest margins while the Federal Reserve increases interest rates. I expect Bank of America to also benefit from the health of the current business environment.

The demand for residential and commercial loans has been strong overall with global banking loan growth up 3% year-over-year. This is creating a market for buying and selling loans by the banks. Bank of America is set to benefit as the company continues its 3% down payment program for mortgages for consumers with certain income levels. This program should help drive mortgage demand from first time home buyers. So, the company can benefit from the originations/interest payments and add to their revenue by buying and selling loans.

As the Millennial generation becomes more established in their careers, they are likely to be increasingly looking to purchase their first home. Millennials are now the largest living generation in the United States. Therefore, I expect Bank of America to continue to see loan growth with the 3% down payment program in place, which is likely to attract this generation.

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I expect Bank of America to benefit from steady economic growth. U.S. GDP growth is expected to be 2.5% in the second half of 2017 and 2.4% in 2018, with consumer spending increasing by about 2.8%. This is likely to create continued commercial and residential loan growth for Bank of America through next year.

The average GDP growth for the 1st half of 2017 was 2% (1.4% in Q1 and 2.6% in Q2]. So, with the growth rising a bit for the 2nd half as compared to the 1st half, Bank of America is likely to experience loan growth.

Valuation is Below Average

I am using the Price to Book ratio to value Bank of America against its peers. I like this ratio for banks as it weighs the valuation based on their assets and liabilities. The balance sheet is important for banks since it shows how much the banks owe and how much is owed to them. I see the balance sheet as a great measure of financial health for banks.

Bank of America with a Price/Book ratio of 1.01, has one of the lowest valuations among its peers. Citigroup (C) with a Price/Book of 0.89, is the only Large-Cap Money Center Bank trading below Bank of America. Bank of America is trading about 19% below the industry average Price/Book of 1.25 (includes all Money Center Banks).

Here’s how BAC compares to its peers:

Bank of

America

JP Morgan

(JPM)

Citigroup

(C)

Wells Fargo

(WFC)

Royal Bank of Canada (RY)

Price to Book

1.01

1.44

0.89

1.47

2.08

Source: finviz.com

The average Price/Book for just the 5 Large Banks listed here is 1.38. With Bank of America trading about 27% below its peers, the stock has room to run higher.

Earnings Growth to Catalyze the Stock

Not only is Bank of America attractively valued, but the company is expected to have higher growth than its peers. Bank of America is expected to grow earnings at about 21% in 2017 and about 20% in 2018 (consensus). That is high growth as compared to the company’s competitors.

Here’s how the earnings outlook looks:

Consensus

Estimates

Bank of America

JP Morgan

Citigroup

Wells Fargo

Royal Bank of Canada

Expected EPS Growth 2017

21%

10%

11%

4.5%

8.5%

Expected EPS Growth 2018

20%

11%

14%

6.5%

5.3%

Source: finance.yahoo.com

With the highest expected earnings growth among the large banks, Bank of America is poised to outperform. Having 20% earnings growth is indicative of a strong growth stock. If the company can achieve this for 2 years, the stock is likely to outperform the S&P 500 (SPY) through 2018 in my opinion.

Conclusion

With an attractive valuation and strong double-digit earnings growth, Bank of America is set to outperform the S&P 500 and the other large banks through 2018. In addition to price appreciation, investors will also benefit from an approximate 2% dividend yield.

The risk for the stock is that banks are highly cyclical. Therefore, the stock could take a larger than average hit during a recession. However, I don’t see a recession happening this year or in 2018.

Bank of America is set to benefit from the current business environment at least through 2018. The company has the right policies to attract loans, while getting incremental increases in net interest margin as the Federal Reserve increases rates. I forecast the price to hit about $30 over the next year, driven by earnings growth of at least 20%.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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