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Bank of America Corp (BAC): Wall Street Cheers an OK Quarter
Things aren't as bad as the bank's valuation metrics say they are. In fact, BAC looks like a cheap, quality stock
By Dan Burrows, InvestorPlace Feature Writer | Apr 14, 2016, 1:08 pm EDT
Part of the bull case on Bank of America Corp (BAC) is its sensitivity to an improving U.S. economy.
Well, that certainly helped in an otherwise mixed earnings report out this Thursday.
Bank of America’s profit per share matched Wall Street’s average estimate, but revenue came in light. As expected, the bank had to set aside more cash to cover souring loans in the oil patch
and higher-margin segments like trading were about as bad as feared.
And yet BAC stock was up around 3% in noon trading
The market was surely cheered by bigger-than-expected cost cuts — and BAC’s pledge to find more — but patient investors should latch on to something even better.
BAC’s consumer banking unit — by far its biggest unit — saw revenue rise 4% thanks to higher deposits and more loans. The boring old business of straight-up banking is doing just fine. That
speaks well of the economy and BAC’s exposure to it.
Besides, even the bad parts of the report weren’t really all that bad. It was well known that Wall Street had a poor first quarter.
The first three months of the year are usually seasonally strong, but not this year. Global growth is weak. Worries about China, a surprise rate cut in Japan, negative rates in Europe and
uncertainty over Federal Reserve policy at home have made markets choppy. Capital markets, equity markets, currencies, initial public offerings are hurting results.
Analysts were well aware of this fact.
BAC Stock Is Too Beaten Down
Both JPMorgan Chase & Co. (JPM) and Wells Fargo & Co (WFC) already beat Street estimates. BAC followed it up with earnings that came to 21 cents a share, matching the forecast
compiled by Thomson Reuters.
Revenue missed estimates, coming in at $19.57 billon vs. the $20.3 billion projection, but that was driven by the expected weakness in trading and energy-sector loans.
It’s not good, but neither is it a complete surprise. The bad news was largely priced in.
That’s why progress in cost cuts and consumer banking is such positive news. The market always loves expense reduction, and it serves as a near-term catalyst for Bank of America stock.
Meanwhile, progress in consumer banking reveals the effects of low unemployment and wage growth. A resurgent U.S. economy is a long-term tailwind for BAC stock.
Banks are unpopular these days, and things will probably stay that way for a while. The energy sector is costing them an uncertain amount of money, and the market hates uncertainty. Interest
rate policy is likewise uncertain. Neither of these conditions look like they’ll abate anytime soon.
But BAC stock looks overly cheap even after including all these concerns. The price-to-book value is 0.61. That’s the lowest level among the four big bank stocks. Sure, that could be because
Bank of America is in trouble, but we’ve seen no evidence of that.
Shares in BofA will probably take a long time to get any sort of multiple expansion. The whole industry is under pressure.
But if you’re looking for a cheap bank stock, BAC is one of them.
BlackRock Gains $36 Billion in New Client Funds, But Misses
Earnings Expectations.
Money manager said in March it would cut about 400 jobs, or about 3% of its staff.
By Sarah Krouse
The Wall Street Journal
Updated April 14, 2016 12:29 p.m. ET
The world’s largest money manager pulled in new client
money during the first quarter despite choppy global
markets, the latest sign of an investor preference for
products that mimic broad indexes.
BlackRock Inc. attracted $36.1 billion in new funds from
investors, and the largest amounts came from clients in
North and South America. The division that offers
exchange-traded funds took in $24.25 billion of the total.
The start of the second quarter looks brighter for global markets after a “very volatile” start to the year, BlackRock Chief Executive Laurence
Fink said in an interview Thursday. “With a rally going on now we have more tailwinds instead of headwinds going into the quarter."
Mr. Fink said he expects greater market stability when there is clarity around political issues globally such as whether the U.K. will remain in
the European Union and who the U.S. presidential candidates will be. “Markets like certainty,” he said.
BlackRock took a $76 million restructuring charge in the first quarter related to laying off 400 people, part of an effort to “streamline and
simplify” the firm. The cuts, which impact about 3% of staff, represent the company’s largest-ever round of planned layoffs.
Exchange-traded funds, or ETFs, are securities that
typically track an index or other baskets of assets.
Investors have flocked to these products rather than rely
on old-school managers to pick winners.
Mr. Fink said the cuts were “not coming from any one area” and the firm expects to end the year with a net increase in firm-wide headcount.
Despite the inflow of money, BlackRock’s profits dropped
20% as compared with the same period a year ago. New
stresses in a bull market that has lasted roughly seven
years meant BlackRock wasn’t able to collect as much in
fees as investors retreated from equities and other riskier
investments. Overall, the company collected less from
advisory, administration and securities lending services
than the same period a year ago.
Analysts had projected an adjusted $4.29 a share in earnings on $2.72 billion in revenue, according to Thomson Reuters.
BlackRock’s shares rose more than 1.5% during latemorning trading. “On balance, results were really quite
good,” said Jim Shanahan, an analyst at Edward Jones.
“The key takeaway here is it’s likely we’re going to see
net outflows for the industry overall for the fourth
consecutive quarter, meanwhile BlackRock is delivering
net positive inflows.”
BlackRock’s first quarter profit was $657 million, down from $822 million a year earlier. Per-share earnings fell to $3.92 from $4.84. Excluding
the restructuring charge and other one-time items, BlackRock earned $4.25 a share, down from $4.89 a year earlier.
Revenue, meanwhile, fell by about 4% to $2.62 billion. Assets under management fell to $4.74 trillion. That was down 1% from a year earlier,
but 2% higher than in the fourth quarter.
Despite the difficult quarter for financial markets, BlackRock’s actively managed funds pulled in net new money during the quarter, though
performance in those products was mixed. More of the firm’s actively managed stock funds outperformed their benchmarks or peers over one
year, but performance declined for its taxable-bond funds, tax-exempt fixed-income funds and the firm’s quantitative “scientific” active equity
strategies.
Only half of the firm’s taxable and 37% of tax-exempt bond funds outperformed over one year at the end of March, compared to 81% and
62% a year earlier. Of the firm’s scientific active equity funds, 41% outperformed their peers or benchmarks over one year at the end of the
first quarter, down from 88% a year earlier.
“One quarter doesn’t make a trend,” Mr. Fink said, adding that April had been stronger than the first quarter, when “performance as an
industry was much weaker.”
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