After all, BAC stock has run up some 35 percent since the November presidential election, running circles around the Standard & Poor’s 500 index, which is up 12 percent since then. But the dual narrative of President Donald Trump’s anti-regulation regime and Federal Reserve interest-rate hikes sending Bank of America to the moon hasn’t quite materialized – at least not nearly enough to match months’ worth of hype.
If you ask Bank of America Corp (ticker: BAC) shareholders how they feel about the past half-year or so, you’re sure to get an answer that can only be described as “hedged happiness.” Bank of America, as a result, finds itself entering its first-quarter earnings report in a double-digit slide since its early March highs that has eaten all but 1 percent of its gains in 2017, versus a respectable 4 percent performance by the broader market.
The question now is: What can BAC do to rekindle the kinds of go-go gains it earned in the “Trump Bump”?
The headline numbers: Wall Street has some pretty optimistic views of what Bank of America will bring to the table for Tuesday’s first-quarter earnings report. Revenues are expected to expand 9.6 percent from last year’s quarter to $21.6 billion, while earnings should sprout by 25 percent to 35 cents per share.
A beat should be … well, money in the bank.
BAC has posted earnings beats for seven consecutive quarters, so it’s managing expectations well on its own. But Wall Street also appears to have laid down a low bar for big-bank earnings this quarter. Citigroup (C) and JPMorgan Chase & Co. (JPM) beat first-quarter estimates by roughly 9 percent, and even beleaguered Wells Fargo & Co. (WFC) managed to come in 3 percent ahead of the consensus mark.
The flip side? Those three performances, all released last Thursday morning, were wasted as the U.S. dropped the “mother of all bombs” on Afghanistan in a strike against ISIS, sending markets (including bank stocks) into reverse.
Bank of America’s secret Is out: Citigroup analyst Keith Horowitz articulated the biggest problem for BAC shares going forward in an April 4 note:
“Since the election, BAC has outperformed and has substantially closed that gap with JPM. … We believe that the benefit of higher rates, the potential post-election improvement in regulatory and economic outlook are reflected in the current valuation. We continue to believe the group is fully valued. So, we do not see a lot left to play for.” Horowitz wrote this in conjunction with a downgrade to BAC shares from “buy” to “neutral.”
Bank of America’s valuation metrics really don’t stand out at first glance. It’s trading at roughly 15 times trailing earnings and at less than 10 times forward earnings, versus about 24 and 18, respectively, for the S&P 500. Meanwhile, BAC stock trades at a slight discount to book, whereas JPM and WFC command premiums at the moment.
But everything is relative, and so it goes with Bank of America. Its price-to-book of 0.93, while attractive in a bubble, is less than where it traded a few weeks ago, but also still higher than at any other point since prices were tumbling in the 2008-09 bear market.
That’s not to say BofA shares couldn’t keep rising despite lofty (by its own standards) valuations, but the story is out and well-worn: Everyone knows that BAC and most other banking stocks will benefit from any Trump action against Dodd-Frank and other financial regulations, and everyone knows that Fed interest-rate increases will help the cause, too – in Bank of America’s case, a 25-basis-point rate hike can generate $600 million in additional profits per quarter.
Wall Street was happy to buy the rumor from early November through mid-December. But twice now – after December’s rate hike, then after March’s rate hike – investors have sold the news.
A second hope. Bank of America still looks like a coin flip heading into Tuesday’s earnings. Yes, expectations are high and investors have been almost cynical in selling off any piece of actual, hard news that paints BofA in a good light.
However, investors were mostly encouraged by the results of the other three banks – it was news of America’s military actions that shook the morning’s gains apart. Also, just last week, Trump began to rattle the Dodd-Frank saber again, promising to knock down the law and other financial regulations. And while BAC’s valuation isn’t stellar, it has become more appealing – compared to many of its mega-cap compatriots – in the wake of its double-digit cool-off.
While it might not be the surest bet, there are enough factors in play that a particularly strong report could spark a wave of renewed optimism in Bank of America.
But this one needs to be a whopper.
Source By money….