M&A business pushes Bank of America Corp. higher

Investment idea by DTI

Exchange: NYSE

Sector: Financial

Industry: Money Center Banks

Entry strategy

Price: $29,0—$30,5

Stop-loss: $27,49

Take profit: $37,5—$38,0

Investment horizon: up to 6 months

Company details

Bank of America Corp. — an american financial conglomerate. It specializes in selling banking products, assets and investments management, financial and risk management and etc. The company provides services in the following sectors: Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets and so on.

Bank of America has actively been developing business in the field of mergers and acquisitions (M&A). On July 23, 2018, the bank announced that it employed senior bankers from UBS Group AG and Deutsche Bank AG due to expansion of its M&A business in the telecommunications and media market.

This management transition resulted in a flow of new customers to Bank of America, which includes Advance Newhouse Communications, TPG Capital, DISH Network Corp and Verizon Communications Inc. It will lead to an increase in cash flows from bank’s M&A business and improvement of its financial performance.

    We expect company’s financial performance and stock prices to improve due to

  • reduction in operating expenses, which will have a positive effect on bank’s profitability;
  • further expansion of the loan portfolio because of increased lending in the US, resulting in an additional interest income;
  • corporate tax rate decrease in the US, which will allow to increase dividend payments and share buybacks;
  • expected invariability of US Federal Reserve rate at the next meeting in August, which will positively affect the stock market of the country.

Company financial performance

On July 16, 2018 Bank of America published financial quarterly results. The bank outperformed better than analysts had expected. In the second quarter, the net profit increased by 36,3% to $6,78 bln. Earnings per share (EPS) accounted for 64% compared to predicted 57% (see Table 2).

Financial summary of Bank of America Corp. performance is presented in Table 1 and Table 2:

Table 1. Financial performance of Bank of America Corp. ($BAC). Source: MarketWatch — Open original image
Table 2. Financial performance of Bank of America Corp. ($BAC) for Q2—Q4 of 2017 and Q1—Q2 of 2018. Source: MarketWatch — Open original image

Bank of America Corp. share price is lower than that of competitors. It is indicated by P/E multiplier value of 14,50, which is below an industry average of 17,81. Company value underestimation is also justified by P/BV and P/CF multiplier values.

For the last year, revenue growth rate has been 15,68%, which is more than 2 times higher than competitors’ rate of 6.37%. During the last 5 years, growth in EPS was approximately 4,6 times higher than those of industry competitors (46,90% compared to 10,20%). Dividend payments similarly grew faster.

Current profitability level of Bank of America is lower than competitors’ levels. However, we expect it to reach the industry average in the medium term due to higher operating efficiency.

Technical analysis (trading plan)

Graph 1. Technical analysis of Bank of America Corp. ($BAC) stock. Source: TradingView — Open original image

Also published on Medium.