Arguably, these are the two best run banks in the United States and they are both trading at ridiculously low multiples. By any measure, these two are cheap and positioned for major movement over the next 6-24 months. Bank of America is trading at $51, only a 10 price-to-earnings multiple of the $4.95 estimate I have for 2007 earnings. The stock pays a dividend right now of $2.56 for a current yield of 5.1%. Bank of America is a coast-to-coast dominant bank with a powerful and complete consumer franchise. With a $5.30 earnings per share estimate for 2008, BAC should trade up to a 13-15 PE multiple putting the price target at $70.
Wells Fargo is trading at $37 for a current PE of 13 times 2007 earnings estimate of $2.75 and 2008 earnings of $3.05 per share. Wells Fargo is a leading consumer-oriented player as well. Wells Fargo has a strong mortgage business, like Bank of America, and although not totally out of the woods yet, the prospects look excellent. Wells Fargo and Bank of America have the financial muscle and the balance sheets to underwrite mortgages and KEEP them on their books. They are not forced to package and sell them like so many small mortgage companies have had to and are now out of the business. BAC and WFC have a higher credit-worthiness requirement of their customers before mortgages are taken on. Yes, both have had to raise their bad debt reserves for the past two quarters and will likely do the same for the third quarter, but they still comfortably achieved earnings expectations.
Both Wells Fargo and Bank of America will not only weather the mortgage crisis, but actually come out of it stronger and more dominant. They will capture the market share abandoned by the smaller, less well-financed players. With that in mind, Wells Fargo and Bank of America will control the fee-based servicing of those mortgages and thus have an opportunity to increase both their earnings and dividend pay-out rates.
Both of these stocks will be among the leaders in the financials. The stock market cannot have any real sustainable up-movement without the financials participating. These two will lead the way.
Georges Yared is the CIO of Yared Investment Research and the author of "Baby Boomer Investing...Where do we go from here?"
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Reader Comments (Page 1 of 1)
9-18-2007 @ 10:37PM
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9-19-2007 @ 8:40AM
eh said...
Arguably, these are the two best run banks in the United States and they are both trading at ridiculously low multiples.
Maybe there's a reason for that? Do you believe that all stocks selling for low multiples are buys? Regarding these two: What sort of 'mark to make believe' assets do they have on their balance sheets? What is their exposure to these now notorious off balance sheet conduits?
Given the shenanigans on Wall St, people who buy financial stocks now may be in for an ugly surprise later on, as all the asset deflation due to bad mortgages (checked the mortgage delinquency and foreclosure numbers recently, or the ARM reset schedule?) and derivatives cannot be hidden forever.