Omakase

Friday, August 12, 2005

BUY: BAC

I promised that I would post my buys and sells, so I'm reporting here that I bought some BAC (Bank of America) at $42.70.

I wouldn't recommend it for everyone, but my buying rationale was as follows:

-the current stock price represents a buying opportunity, as a the MBNA acquisitions announcement and the Fed's increase in interest rates have pushed the stock down ~8% in the last month.

-the decline in price has driven the P/E down to only 10.5 (ttm) and 9.6 (forward.) If this stock gravitates to a 12X p/e in 12 months, the stock will trade at $53 next year, given the $4.43 earnings estimate. That would be a 24% gain, not including dividends.

-PEG ratio is at only 1.05, meaning that you're buying growth at a reasonable price.

-BAC pays a fat dividend (4.22%, equal to .6% after tax - much better than my 2% after tax cash yield.)

-I like Ken Lewis (CEO) and his intent to turn mergers into intended earnings synergies. The consistent pattern of earnings growth seems to prove this.

-I fundamentally believe in their intent to be the first (and probably only, for a while) bank with a nationwide footprint. Account opening stitistics indicate that people are figuring out there's value in having a bank present in both their primary home (say, Boston), and their vacation destination (Florida), and perhaps where they travel on business regular (St. Louis? Carolina? San Francisco?)

-Among competiting retail banks, B of A is close to gaining a lasting scale advantage - they're really separating themselves from the field.

I intend to hold these shares for more than one year. These shares won't double in value any time soon, but if they have just an OK year and provide 10% growth + 4.2% dividend equals a nice, safe annual return.

Thoughts?

1 comment:

Anonymous said...

HI TIM JUST READ YOUR BAC COMMENTS. THE REASONS ALL MAKE SENSE. ONLY DIFFERENCE IS I MAY KEEP MINE FOR 3 TO 5 YEARS.I ALSO HAVE USB FOR ALMOST THE SAME REASONS. DAD

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