Is America’s Most Watched Stock Bank (BAC) Worth Betting Now?
Bank of America (BAC) has been one of the most searched stocks on Zacks.com lately. So, you might want to consider some of the facts that could shape the stock’s performance in the short term.
Shares of that country’s second-largest bank have returned -7.2% over the past month compared to the -8% change in the Zacks S&P 500 composite. The industry Zacks Banks – Major Regional, to which belongs Bank of America, lost 6% during this period. Now the key question is: where could the stock be heading in the near term?
Although media reports or rumors of a material change in a company’s business outlook usually cause its stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately determine the buy and hold decision.
Revisions to earnings estimates
Rather than focusing on anything else, at Zacks we prioritize assessing change in a company’s earnings projection. Indeed, we believe that the fair value of its shares is determined by the present value of its future earnings streams.
Our analysis is primarily based on how sell-side analysts covering the stock revise their earnings estimates to reflect the latest trading trends. When a company’s earnings estimates increase, the fair value of its stock also increases. And when the fair value of a stock is higher than its current market price, investors tend to buy the stock, causing its price to rise. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term movements in stock prices.
For the current quarter, Bank of America is expected to post earnings of $0.80 per share, indicating a -5.9% change from the prior year quarter. The Zacks consensus estimate has changed -1% in the past 30 days.
The consensus earnings estimate of $3.20 for the current fiscal year indicates a -10.4% year-over-year change. This estimate has changed by -0.3% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $3.84 indicates a change of +19.9% from what Bank of America is expected to report a year ago. Over the past month, the estimate has changed by +0.3%.
With an impressive externally audited balance sheet, our proprietary stock rating tool – the Zacks Ranking – is a more conclusive indicator of a stock’s short-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent change in the consensus estimate, plus three more factors related to earnings estimatesresulted in a Zacks rank #3 (Hold) for Bank of America.
The chart below shows the evolution of the company’s consensus 12-month EPS estimate:
12 month EPS
Expected revenue growth
While a company’s earnings growth is arguably the best indicator of its financial health, nothing happens if it can’t grow its revenue. It is almost impossible for a company to increase its profits without increasing its revenue for long periods of time. Therefore, knowing the potential revenue growth of a business is crucial.
For Bank of America, the consensus sales estimate for the current quarter of $23.58 billion indicates a year-over-year change of +3.6%. For the current and future fiscal years, the estimates of $93.59 billion and $102.85 billion indicate variations of +5% and +9.9%, respectively.
Latest reported results and history of surprises
Bank of America reported revenue of $22.69 billion in the latest quarter, representing a year-over-year change of +5.7%. EPS of $0.73 for the same period versus $1.03 a year ago.
Compared to the Zacks consensus estimate of $22.97 billion, reported revenue is a surprise -1.23%. The EPS surprise was -5.19%.
In the past four quarters, Bank of America has exceeded consensus EPS estimates three times. The company has exceeded consensus revenue estimates three times during this period.
No investment decision can be effective without considering the valuation of a stock. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key determinant of its future price performance.
While comparing the current values of a company’s valuation multiples, such as the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio, and the price-to-cash flow (P/CF) ratio , along with its own historical values help determine whether its stock is fairly valued, overvalued or undervalued, comparing the company against its peers on these metrics gives a good idea of the reasonableness of the stock price .
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to traditional and unconventional valuation metrics to rank stocks from A to F (an A is better than a B; a B is better than a C; and so on), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.
Bank of America is rated D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the rating metrics that led to this rating.
The facts discussed here and plenty of other information about Zacks.com might help determine whether it’s worth paying attention to the market buzz about Bank of America. However, its No. 3 Zacks ranking suggests it could perform in line with the broader market in the near term.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.