Bank Of America (NYSE:BAC) Shares Could Hit $20 By 2015

For the past few years, Bank of America (NYSE:BAC) has been through a lot of struggle. The series of lawsuits brought upon the company since the crisis, which also destroyed the company’s earnings, have plagued the bank and its shareholders for years. Negative news regarding the bank and expensive legal payments have dragged down the company’s stock price and kept it from growing.

After Bank of America reached a settlement on its largest lawsuit, that vicious cycle of misfortune might be coming to an end. What does this mean for investors? They can now finally go back to focusing on Bank of America’s business instead of its legal woes.

Below is a DCF model, which takes the company’s metrics such as dividends, earnings estimations, and discount rate.

	2013	2014	2015	2016	2017	2018	2019
Earnings Forecast
Prior Year earnings per share		$0.90	$0.80	$1.50	$1.62	$1.75	$1.89
x(1+Forecasted earnings growth)		-11.10%	87.50%	8.00%	8.00%	8.00%	8.00%
=Forecasted earnings per share		$0.80	$1.50	$1.62	$1.75	$1.89	$2.04

Equity Book Value Forecasts
Equity book value at beginning of year		$21.17	$21.77	$22.87	$23.99	$25.14	$26.33
Earnings per share		$0.80	$1.50	$1.62	$1.75	$1.89	$2.04
-Dividends per share		$0.20	$0.40	$0.50	$0.60	$0.70	$0.80
=Equity book value at EOY	$21.17	$21.77	$22.87	$23.99	$25.14	$26.33	$27.57

Abnormal earnings
Equity book value at begin of year		$21.17	$21.77	$22.87	$23.99	$25.14	$26.33
x Equity cost of capital	8.40%	8.40%	8.40%	8.40%	8.40%	8.40%	8.40%
=Normal earnings		$1.78	$1.83	$1.92	$2.02	$2.11	$2.21

Forecasted EPS		$0.80	$1.50	$1.62	$1.75	$1.89	$2.04
-Normal earnings		$1.78	$1.83	$1.92	$2.02	$2.11	$2.21
=Abnormal earnings		-$0.98	-$0.33	-$0.30	-$0.27	-$0.22	-$0.17

Valuation
Future abnormal earnings		-$0.98	-$0.33	-$0.30	-$0.27	-$0.22	-$0.17
x discount factor(0.084)		0.923	0.851	0.785	0.724	0.668	0.616
=Abnormal earnings disc to present		-$0.90	-$0.28	-$0.24	-$0.19	-$0.15	-$0.11

Abnormal earnings in year +6							-$0.17
Assumed long-term growth rate							3.00%
Value of terminal year							-$3.16

Estimated share price
Sum of discounted AE over horizon		-$1.76
+PV of terminal year AE		-$1.95
=PV of all AE		-$3.71
+Current equity book value		$21.17
=Estimated current share price		$17.46

In this table, the company’s fair value is calculated out to be about $17.50, which is roughly 8 percent higher that the price that shares trade at right now. That provides a decent margin of cushioning. Now it is important to explain what that number means and how that number was calculated.

$17.50 is a fair value number, not a price target. The difference is that a price target is a estimation of the company’s earnings per share in the future at a certain point. The fair value shoes the valuation of the shares today. So that means that the current value of Bank of America’s future expected earnings flow is $17.46 after adjusting for dividends. This provides a safety net between the actual price now and the fair value.

Does this mean that investors should be buying into Bank of American right now?

Well, first we can see on the chart, that Bank of America’s shares fell from $18 to $15, but bounced right back up past $16 shortly after the news about the settlement was released. This is positive news, mostly because it shows that the company’s shares have reached higher levels than its previous bump in July.

Another reason is because the 50 DMA is now ready to overtake the 200 DMA once the shares reach the $16 a share range or higher for more than a few weeks. If this were to happen, that would signal investors that additional funds will be coming into the stock.

Additionally, the bank’s fundamental values are constantly improving. Bank of America has faced challenges with its earnings per share for many years as a result of the poor acquisition decisions it made during the financial crisis, and the constant flow of billion dollar expenses in legal bills that it had to pay. But despite these financial and legal woes, Bank of America is a company that is earning money as it recovers and preparing for shareholders a few years of nice growth in earnings. So far, Bank of America has been underperforming in all the basic metrics of banks, including net income and return on assets, due to its challenge with its legal expenses.

Simply the fact that the distraction of court cases and legal bills are now gone, means that the company’s management can direct all their efforts on making money and generating value for customers rather than fighting off allegations from the government. This also means that billions of dollars is now available to be invested back into the business or given back to the shareholders. Besides its fundamentals, even in a situation with a low interest rate, the company is now able to give back more capital to its shareholders.

Bank of America has been caught up with its legal issues for years, and that was a significant reason for paying nearly no dividends to its shareholders for the past few years. Any and all capital paybacks to shareholders had to go through an approval process by the federal government, so Bank of America had to yield to its primary regulator and was also bound by the numerous legal bills.

With such disruptions out of the way, Bank of America is slatted for a big comeback in 2015. The bank’s dividend has already been increased, and it is likely to be raised again next year. With the combination of stronger fundamentals, increased earning power, and the high chance that the returns of capital will shoot through the roof means that Bank of America’s stock is a bargain buy. While it is not yet an income stock, Bank of America has a very high probability of getting to that point, and the combination of a solid dividend and repurchases should appeal to more investors.