Bank of America stock has returned 120.9% over the past three years, and the current valuation signals point to a company that still screens as undervalued even after that strong run, with both the intrinsic value work using the Excess Returns model and earnings multiples suggesting the market price sits below a reasonable estimate of worth.

• A 120.9% three year gain sets a high bar, which means any remaining gap to intrinsic value matters more for investors who already hold or are considering adding to a position.
• On the positive side, expectations for stronger earnings supported by higher interest rates and fee income can support the case that Bank of America’s cash flows justify a higher valuation, while regulatory and compliance issues such as the recent SEC penalty for its Merrill Lynch unit may weigh on how much of a discount the market is willing to close.
• With a value score of 3 out of 6, the broader checks show a mixed picture rather than a clear bargain, even though both the intrinsic value estimate and market multiples currently lean to the undervalued side.

The issue now is whether Bank of America’s recent share price performance has already captured most of that implied upside or if the remaining discount still offers a meaningful margin of safety for long term investors.

Is Bank of America Still Cheap on Excess Returns?

The Excess Returns model looks at how much profit Bank of America can generate over its cost of equity and builds an intrinsic value from that spread. For Bank of America, the model is anchored on a book value of $38.66 per share and a stable earnings power of $5.28 per share, based on weighted Return on Equity estimates from 13 analysts. With an average Return on Equity of 12.20% and a cost of equity of $3.81 per share, the implied excess return of $1.47 per share suggests the bank is expected to earn more than its equity charge on a relatively steady capital base, which is projected to rise to a stable book value of $43.26 per share.

Putting those inputs together, the Excess Returns model arrives at an intrinsic value of $71.07 per share, which implies the stock screens about 17.4% undervalued versus the current market price. The recent SEC fine for Merrill Lynch’s AML reporting failures helps explain why some investors still apply a discount, even as the model points to value supported by expected returns on equity.

Overall, the Excess Returns work suggests Bank of America stock currently looks undervalued relative to its projected ability to earn above its cost of equity.

Our Excess Returns analysis suggests Bank of America is undervalued by 17.4%. Track this in your watchlist or portfolio, or discover 44 more high quality undervalued stocks.

Does Bank of America Look Undervalued on Earnings?

The P/E ratio fits Bank of America well because earnings are a central driver for large, mature banks. Right now, Bank of America trades on a P/E of 13.8x, slightly below both the peer average of 14.8x and the wider banks industry average of 12.2x, which puts it in the middle of the pack rather than at an extreme.

The fair P/E ratio for Bank of America, which reflects its size, margins, risk profile and sector, is 16.0x. That is above the current 13.8x, so the stock trades at a discount to what this framework suggests would be reasonable, even after strong recent performance and mixed sentiment around large banks. The gap is not huge, but it points to some residual caution in the price despite solid analyst expectations for earnings.

On this P/E yardstick, Bank of America stock appears undervalued relative to the earnings multiple the company might typically command.

The Bank of America Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Bank of America pick up where the valuation work leaves off by spelling out which assumptions on Bank of America's future growth, margins and earnings would need to hold for the stock to be worth materially more or less than today's price, and they sit on the company’s Community page. Each Narrative sets out fair value as a thesis you can revisit over time, rather than a one off snapshot, so you can see how the reasoning holds up as new information arrives.

Here is a chance to add your voice to the Simply Wall St community by sharing a Narrative on Bank of America that sets out your numbers based view on whether developments like its interest rate outlook and regulatory work justify today's valuation.

Lay out the case you see for Bank of America's earnings power and risk profile, and then track how that thesis holds up as new results, guidance and news are released over time.

Do you think there's more to the story for Bank of America? Head over to our Community to see what others are saying!

The Bottom Line

For Bank of America, both the Excess Returns intrinsic value work and the P/E comparison point in the same direction, suggesting the stock still screens as undervalued rather than fully priced. The key question is whether the market eventually closes that gap or keeps a discount in place because of regulatory and compliance risks. What matters most from here is how consistently Bank of America converts its balance sheet and interest rate backdrop into sustainable earnings, without further setbacks on the regulatory front that could turn the current discount into more of a value trap instead of an opportunity.

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.