Bank of America: Analyst Downgrade Loser
The broad indexes all ended with slight gains after Alcoa (AA) kicked off earnings season after Tuesday's market close by reporting fourth-quarter net income of six cents a share on $5.9 billion in revenue. The bottom line match the consensus estimate among analysts polled by Thomson Reuters, but revenue beat the $5.6 billion estimate.
The KBW Bank Index (I:BKX) was down 1% to close at 52.89, with winners and losers roughly split.
Shares of Comerica (CMA) of Dallas were down 1% to close at $31.60, after Oppenheimer Securities analyst Terry McEvoy on downgraded the company to a "Perform" rating from "Market Perform," saying that the recent rise in long-term rates would do nothing for the stock. McEvoy on Wednesday also upgraded KeyCorp (KEY) to "Outperform" from "Perform," with a price target of $11.00, citing the company's improved geographic strategy. KeyCorp's Shares also pulled back 1% to close at $8.90.
Both of these ratings actions are discussed in more detail in TheStreet's earnings preview for regional banks, as is the Wednesday announcement by PNC Financial Services Group (PNC) of several one-time items that will lower third-quarter earnings by 47 cents a share. PNC's shares declined slightly to close at $60.17.
Bank of America's Downgrade
Bank of America's shares have now declined by 2% during 2013. The shares rose 110% during 2012, after dropping 58% during 2011.
The shares trade for 0.9 times their reported Sept. 30 tangible book value of $13.48, and for 11.8 times the consensus 2013 earnings estimate of 97 cents, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.27.
Bank of America's forward price-to-earnings ratio is rather high when compared to the rest of the "big four" banking club, and even looks high when compared to the high-flying U.S. Bancorp (USB) , which was trading for just 10.8 times the consensus 2013 EPS estimate of $3.08 when the shares closed at $33.27 on Wednesday.
And none of the big four have come close to matching USB's stellar return on average tangible common equity of 21.60%, according to data supplied by Thomson Reuters Bank Insight.
Credit Suisse analyst Moshe Orenbuch on Wednesday downgraded Bank of America to a neutral rating from an "Outperform" rating, even though he raised his price target for the shares by a dollar to $12.00, saying that the stock's "current valuation appears to be ahead of the company's near to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting."
Orenbuch said that "At its current valuation, the shares appear to be discounting at least a 16% improvement in costs over the next year vs. our estimate of 10%," and that "despite the announced mortgage servicing sales, it will take until 2014 for the annual run-rate of expense saves. Separately, we think it will be hard for Bank of America to grow revenues faster than the 'average' bank."