Bank of America stock at a record high

Bank of America (BAC) hit a record high on July 6, rising 2% as investors reacted to upgraded Q2 earnings estimates, stronger sentiment around core banking and trading, and a broadly stronger large bank sector.

The record high caps a strong run for Bank of America, with the share price up 11.3% over the past month and 19.1% over 90 days. The 1 year total shareholder return of 25.8% and 3 year total shareholder return of 125.3% point to momentum that investors currently associate with improving earnings visibility and reduced perceived risk around large U.S. banks.

If you are looking beyond big banks for what is moving next, this is a good moment to scan the market for 20 top founder-led companies

The latest surge in Bank of America stock can be read in two very different ways, either as a clear reflection of stronger earnings power or as investors crowding into a popular large bank trade. Which story do the current valuation markers support?

Price-to-Earnings of 14x: Is it justified?

Right now, Bank of America is being assessed through a P/E of 14x, which sits between its own fair P/E estimate and the wider US banks peer group.

The P/E multiple compares the current share price with earnings per share, so for a large bank like Bank of America it is often used as a quick check on how the market is pricing its profitability.

According to the checks provided, Bank of America is described as good value versus its estimated fair P/E of 16.1x, yet expensive against the broader US banks industry average of 12.2x. That mix suggests investors are currently willing to pay more than the typical US bank for its earnings, while the regression based fair ratio still leaves room for the market to move toward a higher multiple if expectations hold.

The contrast is clear. Compared to direct peers with a 15.1x average P/E, Bank of America trades on a slightly lower multiple. Compared to the wider US banks industry on 12.2x, the stock sits at a premium that reflects stronger perceived earnings quality and growth than the sector aggregate, but not a top tier valuation relative to closest peers.

Result: Price-to-Earnings of 14x (ABOUT RIGHT)

However, Bank of America’s current narrative could be challenged if revenue or net income growth of around 6% slows, or if sector wide sentiment around large banks weakens.

Another view on Bank of America’s value

Looking beyond the P/E, the SWS DCF model values Bank of America at $71.24 per share versus the current $59.90, which points to the stock trading about 15.9% below that estimate. That is a different message compared with a 14x P/E that looks roughly in line. Which one do you put more weight on?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Bank of America for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 41 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With sentiment around Bank of America clearly split between potential risks and rewards, this is a good time to review the key data yourself and decide how it fits your portfolio view. You can start with the 4 key rewards and 1 important warning sign

Looking for more investment ideas beyond Bank of America?

If you are building out your watchlist, now is the ideal time to widen your search and let structured screens surface opportunities you might otherwise miss.

• Spot potential mispricing by checking out 41 high quality undervalued stocks that combine quality fundamentals with room for the market to reassess their pricing.
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• Reduce portfolio stress by filtering for 74 resilient stocks with low risk scores that score well on resilience and more measured risk profiles.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.