North America

Earnings Preview: Bank of America Q1 2017 (BAC)

By: Craig Bowles

Overview

Bank of America (BAC) is scheduled to report 1Q 2017 earnings before the opening bell on Tuesday, April 18th. The results are expected to be released at approximately 6:45 a.m. ET with a conference call webcast at Bank of America Investor Relations to follow at 8:30 a.m. Bank of America has the potential to impact the broader market indices, including the S&P Index Futures and corresponding ETFs. BAC’s earnings will follow last week’s releases by JP Morgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC).

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The analyst consensus estimate is $0.35 (range $0.31 to $0.37). (Source: Yahoo! Finance) Consensus was $0.34 three months ago. Bank of America typically provides a clean earnings number but could produce an Adjusted Earnings Per Share or Earnings Per Share Excluding Items when necessary that compares with consensus estimates.
  • Revenues: Consensus expectations are for a 9.6% y/y increase to $21.62 bln (range $20.93 bln to $22.10 bln).
  • Bank of America shares have a Price/Book of 0.9 compared to the 5-year average 0.7; Price/Revenue of 2.9 compared to the 5-year average of 1.8; Price/Cash Flow of 13.5 compared to the 5-year average of 4.8. The dividend yield of 1.2% compares to the 5-year average 0.7% but below the industry’s 3.1%.
  • Analysts are generally bullish on BAC, with 24 (20 last qtr) Buy, 7 Hold, and 1 (0 last qtr) Sell ratings. (source: MarketBeat.com)
  • Insiders sold 1,909,887 shares in the last three months. (source: NASDAQ.com) In June of 2016, BAC approved a $5 bln stock buyback similar to what had been the amount in 2013. The bank also increased the dividend 50% as part of a Fed approved plan to return $8 bln to shareholders.
  • BAC initially paid $4 billion for Countrywide Financial but has spent over $80 billion to resolve litigation claims and penalties. The Merrill Lynch purchase was another head scratcher. Since 2010, Bank of America has spent an estimated $194 billion to cover costs linked to the financial crisis.
  • Bank of America shares have a 1-day average price change on earnings of 1.65%. Options are pricing in an implied move of 3.38% off earnings.

Recent News

  • 04/04: Citigroup downgraded Bank of America to Neutral from Buy citing rich valuations following the U.S. bank’s post-election rally, according to a post on Barron’s.com.
  • 03/15: Bank of America’s Merrill Lynch may not entirely do away commission-based accounts if the DOL rule is implemented, according to a post on Barron’s.com.
  • 02/21: While the XLF is up 45% in the past year, Ladenburg Thalmann notes that bigger banks’ earnings will benefit from rising rates more than smaller banks given that they have some $5 trillion in investible, liquid assets, according to a post on Barron’s.com.
  • 02/17: The country’s biggest banks would see an average jump in annual profits of 14% if Trump is able to push his plan through. The KBW Bank Index has risen 29% since the election, according to a post on Barron’s.com.
  • 02/03: Bank stocks have gained partially on President Trump’s plan roll back financial regulations such as Dodd-Frank and another executive action aimed at rolling back a controversial regulation scheduled to take effect in April that critics have said would upend the retirement-account advisory business, according to a post on Barron’s.com.
  • 02/01: Morgan Stanley remains Overweight the big banks while pointing out that  large cap banks are trading relatively in-line with historical multiples, but that’s on current EPS estimates and there are several positive catalysts this year: stable-to-lighter touch on regulation, infrastructure spend, deficit-led growth, rate hikes and potential for lower taxes, according to a post on Barron’s.com.

Technical Review

Major banks were leaders in the Trump rally and Bank of America stock has been one of the strongest banks the past year. Banks also led this market pullback below the 50-day moving average. Point and figure technicians show a balance area around $16 if the stock were to breach the 200-day moving average. (Chart courtesy of StockCharts.com)

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Summary

Bank of America still has a bullish analyst following and the stock has been supported by the Fed approved stock buyback increase and dividend hike. Insiders show a pickup in selling the past three months. The new Fed rule possibly requiring an additional $20 billion in capital from the bank hasn’t been widely talked about. Over the last four quarters, the bank has beaten estimates by an average of 6c. Estimize consensus for an EPS of $0.37 on revenue of $21.578 bln compares to analyst consensus of $0.35 on revenue of $21.62 bln.

 

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