Bank of America (NYSE: BAC) wants the
government out of its capital structure (and, by extension,
its affairs), and it wants to start Uncle Sam on its way by
repaying the $20 billion in direct aid it received as an
incentive to close the Merrill Lynch acquisition. As B of A
prepares a government exit, should investors take the
entrance door by
picking up some of the bank's common shares?
Bank of America -- unplugged
A first repayment of TARP monies would be significant
in helping B of A catch up with peers
JPMorgan Chase (NYSE: JPM),
Goldman Sachs (NYSE: GS), and
Morgan Stanley (NYSE: MS), who have already
returned the government's investments.
Having the government on board could well act as an anchor
on the business … and the stock. As Bank of
America CEO Ken Lewis told Bloomberg TV in a May interview:
"Every institutional investor that we talk to says that
you're not going to realize the full value of your stock
until you get the government out and you don't have that
threat of them doing something or running your business."
Short-term catalyst vs. long-term value
Will the government's exit act as a short-term catalyst
for the stock? Perhaps, but I don't think that's a bet worth
making; after all, the stock has already
rallied nearly 600%from its March low, as the fear of a
wholesale government takeover has receded.
A better reason to consider buying the shares is that they
don't look absurdly expensive on the basis of their
normalearnings power. As the following table
indicates, as investors with a multi-year time horizon look
beyond current-year earnings, the numbers start making a lot
more sense:
P/E (Current Fiscal Year)
P/E (Current Fiscal Year + 1)
P/E (Current Fiscal Year + 2)
Bank of America (NYSE: BAC)
29.5
18.0
7.5
Citigroup (NYSE: C)
-
37.9
13.6
JPMorgan Chase (NYSE: JPM)
26.1
14.4
8.9 Continued... |