North America

Earnings Preview: Bank of America Q3 2016 (BAC)

By: Craig Bowles

Overview

Bank of America (BAC) is scheduled to report 3Q 2016 earnings before the opening bell on Monday, October 17th. The results are expected to be released at approximately 6:45 a.m. EST 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 reports 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 $0.33 (range $0.30 to $0.36). (Source: Yahoo! Finance) Consensus was $0.35 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 0.1% y/y increase to $20.94 bln.
  • Bank of America shares have a Price/Book of 0.7 compared to the 5-year average 0.6; Price/Revenue of 2.2 compared to the 5-year average of 1.6; Price/Cash Flow of 3.1 compared to the 5-year average of 4.2. The dividend yield of 1.4% compares to the 5-year average 0.6% but below the industry’s 3.6%.
  • Analysts are generally bullish on BAC, with 20 Buy, 9 Hold, and 0 (1 last qtr) Sell ratings. (source:  MarketBeat.com)
  • Insiders sold 61,948 shares in the last three months and sold a net 2,915,264 shares in the past year. (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 close to $80 billion to resolve litigation claims and penalties. 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 2.79%. Options are pricing in an implied move of 4.08% off earnings.

Recent News

  • 10/07: Sandler O’Neill increased BAC estimates for Q3 and Q4 citing strong underwriting and trading revenue from fixed income, currency and commodities, according to a post by Barron’s.com.
  • 10/07: BAC Merrill Lynch brokers would no longer receive commissions on IRAs, according to a post by Barron’s.com.
  • 10/06: John Thiel will become vice chairman of Global Wealth and Investment Management (GWIM) at the start of next year.
  • 09/16: Goldman Sachs reiterated CL-Buy rating on Bank of America citing increased confidence that BAC can reach 10% ROTCE by 2018 on the belief that the bank is hitting an inflection point with operating leverage, according to a post by Barron’s.com.
  • 08/31: Strategas Research Partners like bank stocks like Bank of America citing that the % of Bank stocks trading to a 65-day high expanded to nearly 60%, according to a post by Barron’s.com.
  • 08/30: S&P Global Market Intelligence expects the largest U.S. banks to benefit from any rise in short term interest rates with Bank of America getting an incremental $120 million in revenues (a 0.15% boost) per rate hike, according to a post by Barron’s.com.

Technical Review

Bank of America stock has shown some relative strength since the first quarter low when compared to other major banks. Point and figure technicians already met their bearish price objective of $11.50 and have a tentative bullish objective of $23.50 but the balance area goes up to $18. (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. Lower litigation expenses are expected. Earnings still are in a tough environment of increased regulation and slow economic growth. Over the last four quarters, the bank has beaten estimates by an average of 6c. Estimize consensus for an EPS of $0.35 on revenue of $20.827 bln compares to analyst consensus of $0.33 on revenue of $20.94 bln.

 

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