The adorable woodland creature Dick Bové would likely to kindly shut up about "failure," cause that's never gonna happen. Bank of Amerillwide is a buy, for a variety of reasons, among them being the fact that Ken Lewis is "the best operating manager of any bank in the United States."
Bank of America (BAC): Fighting for Credibility
• Bank of America's stock is now selling at 0.28x expected 2009 revenues; 6.9x expected 2009 earnings; 0.19x stated book value; 0.50x tangible book value. Its market capitalization is 3.4% of its total deposits and 1.7% of its assets.
• These numbers are clear, investors believe that this bank is about to fail and be nationalized by the United States government. If they believed that it would continue as an operating entity it is unlikely that the bank would be selling at such a low value.
• One reason for this conviction, on the part of investors, is Bank of America's acquisition of Merrill Lynch. It is felt that either the company did not do the appropriate due diligence before making this acquisition, or that the company lacked the ability to understand how bad Merrill's problems were. In either case a lose/lose situation.
• Management is now fighting back. In an article in today's Wall Street Journal it is reported that the United States coerced Bank of America into buying Merrill against management's will. This article could only have come from an interview with Bank of America's management. The point to investors is "we knew what was going on but we had no choice."
• This, to some extent, alleviates the questions concerning management's competence. It does not take away the belief on the part of investors that the company's woes are so significant that it will fail.
• From my perspective these fears simply make no sense whatsoever. In the fourth quarter, Bank of America's deposits rose by almost a net $9 billion. Its loan loss provision was $8.5 billion but 27% of this was a reserve build and the whole amount was a non-cash charge. It took close to $8 billion in losses related to securities. The portion that was non cash in nature may have been as high as 75%.
• The point is that this bank is cash flow positive. It is not in danger of failure. Plus, the United States is now committed to keep it in business.
• Plus, for the record, I have always believed and continue to believe that Ken Lewis may be the best operating manager of any bank in the United States. Moreover, I continue to think that this company has $5 per share in earnings power.
• In the current environment whereby investors are fixated on tangible common equity adjusted for potential losses, it is impossible to present an opposite view. However, I repeat tangible common equity has no meaning. It is cash flows and asset values that determine the value of a bank and despite some hefty loan losses; Bank of America is a
strong buy on this basis.