Shares of Bank of America Corp (BAC), Warren Buffett’s largest bank holding company (Trades, Portfolio), plunged more than 4% to $ 38.10 at the start of trading on Wednesday:
The stock’s fall follows the publication of disappointing results by Bank of America for its second quarter of 2021. JPMorgan Chase (JPM) and Goldman Sachs (GS) both reported better than expected results, making the numbers of Bank of America even duller.
Headwinds on profits
Faced with headwinds from record interest rates and falling fixed income trading operations, Bank of America reported quarterly revenue of $ 21.6 billion, from 22.3 billion billion dollars in the previous quarter and below analysts’ estimates of $ 21.8 billion. billion.
Meanwhile, earnings per share were $ 1.03 on a GAAP basis, or 80 cents on an adjusted basis, excluding a one-time tax benefit of $ 2 billion. Analysts had called for adjusted EPS of 77 cents. This is a significant improvement over Adjusted EPS of 37 cents reported in the prior year quarter.
Bank of America said the decline in revenue was primarily the result of a 6% drop in net interest income due to falling interest rates. Trading revenues were also well below expectations. While an industry-wide decline was expected in this regard, Bank of America appears to have underperformed with fixed income trading operations generating only $ 1.97 billion in revenue, well below the estimate of $ 2.71 billion from analysts polled by FactSet.
One bright spot for Bank of America investors is that after a series of successful stress tests in June, banks are once again allowed to increase their dividend payments.
On June 28, Bank of America announced that it would increase its quarterly stock dividend from 17% to 21 cents per share starting in the third quarter of 2021.
Buffett’s Favorite Bank
Representing 14.45% of the $ 270.44 billion Berkshire Hathaway (BRK.A) (BRK.B) equity portfolio, Bank of America is Warren Buffett’s preferred banking holding (Trades, Portfolio). The company owns 1,010,100,606 shares of the bank, representing 11.79% of the shares outstanding. This is Berkshire’s second position in shares after Apple (AAPL).
Given Buffett’s confidence in the bank, some investors may view the pullout as a buying opportunity. Peers like JPMorgan and Goldman Sachs were helped by the high income from consulting business on Wall Street, but they also faced the same headwinds as Bank of America. Due to negative investor sentiment right now, Bank of America has the potential to report higher price gains when interest rates are finally raised again.
The pullback brings the stock closer to the value range, although the GuruFocus Value chart still considers the stock to be “moderately overvalued”. It has seen solid progress so far this year and is now trading at a price-earnings ratio of 16.26, which is higher than its 10-year median price-earnings ratio of 15.18 and the median of the sector of 12.
However, with low interest rates expected to continue for at least the next two years, there could be further short-term price declines in Bank of America shares, especially if strong activity on Wall Street continues to decline. make other big banks look good in comparison. Better buying opportunities could very well present themselves later in the year.
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