NEW YORK - Bank of America stock has plummeted to levels not seen since 2009. The market is valuing the company at $37 billion below its tangible equity. The question is, is this discount warranted?
BAC has already set aside $40 billion for loan losses. Here is a couple of ways we could get this valuation.
1) BAC writes down an extra $57 billion of loans this would get tangible book value to $109 billion. (37/0.65 tax rate = 57 billion)
2) BAC continues to earn terrible returns. At the present terrible earnings of BAC earning around $2 billion a quarter the stock is trading at essentially a 10 PE to its normalized degenerate earnings number. IE you would need to be a degenerate to think BAC earnings capabilities would be $8 billion a year. Even under this absurd circumstance the share price would be conservative to fairly valued.
3) The government steals $57 billion from BAC for fun.
So we have listed the scenarios to get the current valuation of BAC. Yet this is what the stock and company could be bought for today.
Mr. Market is a manic depressive personality. He flashes prices every single day. Today Mr. Market is offering the biggest bank in America.
The largest Bank in America will likely be able to earn $20 to $30 billion after tax as the company resumes to its normal earning cycle.
The market capitalization of Royal Bank and BMO two banks from Canada who maybe extra lucky to earn $10 billion a year have a market capitalization of $120 billion. BAC has one of $109 billion.
Now is the time to buy BAC.
To read the full BAC report click here.
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