Should You Buy the Post Earnings Dip in Bank of America?
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In the universe of bank stocks, Bank of America (NYSE:BAC) is considered to be one of “the rest.” That is, that many investors view JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) as “the best.” Anything else pales in comparison.
I’m not going to debate that point except to say that as investors we should be open to exploring opportunities as they present themselves. That looks to be the case with BAC stock. On three occasions in the last month, the stock has swung to over $40 per share. In each case it has failed to hold those gains. However, on the first two occasions, it found support around $38. Will the third time be a victory for the bears?
Bank of America reported second-quarter earnings on July 14. In early morning trading, BAC stock is down 4.75%. However, early indicators suggest that BAC stock is looking oversold. That means that it could be a good time to get in on the stock.
What Did Earnings Tell Us?
The good news came in the form of earnings that smashed expectations. Bank of America recorded $1.03 earnings per share (EPS) which was 26 cents higher than the 77 cents forecast by analysts. However, when a one-time, $2 billion tax gain is removed the bank posted an EPS gain of 80 cents.
On the revenue front the story was not as good. Bank of America posted $21.6 billion. That number was $1.2 billion lower than the $22.8 billion it reported in the first quarter. And it was also down 3.6% on a year-over-year basis.
The Easy Gains Are Likely Over
Like many companies, financial services companies will be facing increasingly difficult comps in the coming quarters. A key reason why Bank of America, like many banks, is posting strong earnings is that they have been able to reclaim funds that were set aside in anticipation of pandemic losses. Over the next several quarters, that will no longer be the case.
Meanwhile, the bank’s revenue numbers were affected by a 6% decline in net interest income due to lower interest rates. When interest rates are low, banks don’t earn as much on the loans they initiate. With interest rates likely to stay low for some time to come, it’s fair for investors to wonder where the revenue growth will come from.
One source will be from trading. However, Bank of America looks to be underperforming the sector here as well. In the quarter, BAC reported fixed-income trading revenue of $1.97 billion. Which was significantly less than the $2.71 billion that was expected per FactSet.
One potential catalyst in the company's earnings report is management’s report that its loan book increased in the second quarter. Analysts will be listening for guidance on the company’s projections for loan growth in the second half of 2021.
The Bottom Line on BAC Stock
The consensus price target among analysts suggests that the stock will be settling in somewhere around $40. But that’s only part of the story. The bank will likely be increasing its dividend and it recently announced the approval of a $25 billion share repurchase plan.
When the bank made these announcements, the stock surged, but it is now once again failing to hold those gains. I suppose that’s to be expected. In a market that appears to be priced for good news, any whiff of a disappointing earnings report is a reason to sell.
But I believe there was more that was good than was bad in Bank of America’s report. And bank stocks are not growth stocks to begin with. With a divided increase likely to come soon, now is a good time to buy BAC stock.
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