Bank of America (BAC) was recently on Zacks.com’s most searched stocks list, so you should consider some of the key factors that could affect the stock’s performance in the near future.
Over the past month, shares of the country’s second-largest bank have returned +2.2% versus a change of +1.6% for the Zacks S&P 500 Composite. During this period, the Zacks Banks – Major Regional industry, which includes Bank of America, has lost 0.3%. The key question now is: what might the stock’s future trajectory look like?
While press releases or rumors about a significant change in a company’s business outlook usually cause the stock to “trend” and result in an immediate price change, there are always some fundamental facts that ultimately determine the buy or hold decision.
Revisions to earnings estimates
Rather than focusing on anything else, we at Zacks primarily evaluate the change in a company’s earnings outlook because we believe the fair value of its stock is determined by the present value of its future earnings stream.
Our analysis is basically based on how sell-side analysts who cover the stock adjust their earnings estimates to take into account the latest business trends. When earnings estimates for a company 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, leading to an increase in its price. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Bank of America is expected to report earnings of $0.80 per share for the current quarter, representing a change of -11.1% from the prior year. Over the past 30 days, the Zacks Consensus Estimate has changed by -1%.
The consensus estimate for current fiscal year earnings of $3.28 represents a change of -4.1% from last year. This estimate has remained unchanged over the past 30 days.
For the coming fiscal year, the consensus estimate of $3.64 represents a change of +11% from Bank of America’s expected earnings a year ago. Over the last month, the estimate changed by -0.1%.
With an impressive outside-audited track record, our proprietary stock valuation tool – the Zacks Rank – is a more conclusive indicator of a stock’s near-term price movement because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have led to a Zacks Rank #3 (Hold) for Bank of America.
The following chart shows the development of the company’s consensus estimate for earnings per share over the next 12 months:
12 months EPS
Sales growth forecast
While earnings growth is arguably the best indicator of a company’s financial health, nothing will happen if a company can’t grow its revenue. After all, it’s nearly impossible for a company to grow its profits over a sustained period of time without increasing its revenue, so it’s important to know a company’s potential revenue growth.
For Bank of America, the consensus estimate for current quarter revenue of $25.41 billion implies a change of +1% year over year. For the current and next fiscal years, estimates of $101.93 billion and $105.65 billion suggest changes of +3.4% and +3.7%, respectively.
Latest reported results and surprise history
Bank of America reported revenues of $25.38 billion in the last quarter, a change of +0.7% year over year. Earnings per share for the same period are $0.83, compared to $0.88 last year.
Compared to the Zacks Consensus Estimate of $25.19 billion, the reported earnings represented a surprise of +0.76%. The EPS surprise was +5.06%.
The company beat consensus earnings per share estimates in each of the last four quarters. The company beat consensus revenue estimates three times during that period.
Evaluation
No investment decision can be efficient without considering the valuation of a stock. Whether the current price of a stock accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key factor in its future price performance.
By comparing a company’s current valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash-flow (P/CF) ratios, with historical values, you can determine whether the stock is fairly valued, overvalued or undervalued. Comparing the company to competitors based on these parameters, on the other hand, gives a good idea of how reasonable the share price is.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional value metrics) ranks stocks into five groups from A to F (A is better than B; B is better than C; and so on), making it helpful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.
Bank of America gets a C grade on this score, meaning it trades on par with its peers. Click here to see the values of some of the valuation metrics that led to this rating.
Conclusion
The facts discussed here and much more information on Zacks.com could help you decide whether the market hype surrounding Bank of America is worth paying attention to. However, its Zacks Rank #3 suggests it could perform in line with the broader market in the near future.
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Bank of America Corporation (BAC): Free Stock Analysis Report
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