North America

Earnings Preview: Bank of America Q4 2016 (BAC)

By: Craig Bowles

Overview

Bank of America (BAC) is scheduled to report 4Q 2016 earnings before the opening bell on Friday, January 13th. 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 be followed the same morning by JP Morgan Chase (JPM) and Wells Fargo (WFC).

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The analyst consensus estimate is $0.38 (range $0.35 to $0.42). (Source: Yahoo! Finance) Consensus was $0.36 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 7.2% y/y increase to $20.96 bln.
  • Bank of America shares have a Price/Book of 0.9 compared to the 5-year average 0.7; Price/Revenue of 3.0 compared to the 5-year average of 1.8; Price/Cash Flow of 7.9 compared to the 5-year average of 4.8. The dividend yield of 1.1% compares to the 5-year average 0.7% but below the industry’s 3.0%.
  • Analysts are generally bullish on BAC, with 20 Buy, 10 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 101,310 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 2.25%. Options are pricing in an implied move of 3.87% off earnings.

Recent News

  • 01/04: Big U.S. banks are set on getting Congress this year to loosen or eliminate the Volcker rule against using depositors’ funds for speculative bets on the bank’s own account, according to a post by Reuters.com.
  • 01/03: Bank of America Corp. is extending its lead in the municipal-bond business with $67.8 billion of sales in 2016, according to a post by Bloomberg.com.
  • 12/21: Moody’s believes the Fed’s new TLAC rule means Bank of America needs another $20.4 billion to buffer against any potential future losses in a crisis, according to a post on Barron’s.com.
  • 12/15: RBC Capital Markets has a Buy rating on Bank of America citing stronger economic growth, lower corporate tax rates, regulatory reform, and higher interest rates, according to a post on Barron’s.com.
  • 12/15: Raymond James upgraded Bank of America to Outperform from Market Perform citing the stock as a general proxy for the health of the economy, and, with expected changes brought by the election, according to a post by Barron’s.com.

Technical Review

Major banks rallied an average of 20% since the Trump election but were led by Bank of America’s 40% rally. Point and figure technicians already met their bearish price objective of $11.50 and have a tentative bullish objective of $44.50. (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. 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 $0.40 on revenue of $21.021 bln compares to analyst consensus of $0.38 on revenue of $20.96 bln.

 

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