Is Bank of America Attractively Priced After Strong 20% Gain in 2024?

If you're sizing up Bank of America and wondering if now is the right time to jump in, you're definitely not alone. Fresh off a strong stretch, the stock has notched an impressive 1.9% gain over the past week and climbed 1.6% over the last month. The real eyebrow-raiser, though, is its long-term trajectory, up nearly 20% year-to-date and an eye-popping 148.7% over the last five years. Clearly, there is momentum behind the ticker, and much of that can be traced to investor confidence in the U.S. banking sector’s stability, along with chatter about potential regulatory changes affecting big banks.

News of continued strength in consumer spending and a solid loan growth outlook have helped reassure investors, counterbalancing lingering economic uncertainty. On top of that, talk about higher interest rates sticking around has many analysts excited about future profit margins for large banks like Bank of America. However, not everything signals a screaming buy. The company currently holds a valuation score of 2 out of 6, meaning it only checks two boxes for being undervalued compared to its peers.

But what does that score really mean, and how should you weigh the different ways we measure whether a stock is “cheap” or “expensive”? Let’s break down the major valuation approaches, and then I’ll share one perspective at the end that might just change how you view Bank of America’s true worth.

Bank of America scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Bank of America Excess Returns Analysis

The Excess Returns valuation model is designed to evaluate how much additional value a company is creating above the minimum acceptable return required by its investors. This model specifically measures the returns generated on the bank's equity, beyond the cost of that equity, and projects these excess profits into the future to determine today's fair value for the stock.

For Bank of America, several key figures shape this analysis. The company's current Book Value stands at $37.95 per share, while a "stable" Book Value is forecast to reach $40.73 per share based on the consensus of 14 analysts. Bank of America's forward-looking earnings power, or Stable EPS, is estimated at $4.45 per share, supported by a healthy average Return on Equity of 10.93%. Importantly, the implied cost of equity is $3.35 per share, and the resulting annual Excess Return sits at $1.11 per share.

According to the Excess Returns model, Bank of America's intrinsic value is calculated at $62.26 per share. With the current stock price sitting about 14.8% below this estimate, the stock appears meaningfully undervalued by this approach.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Bank of America.

Our Excess Returns analysis suggests Bank of America is undervalued by 14.8%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Bank of America Price vs Earnings

When it comes to valuing profitable companies like Bank of America, the Price-to-Earnings (PE) ratio is a go-to metric for many investors. This ratio essentially tells you how much investors are willing to pay for each dollar of a company’s earnings, making it particularly useful for banks with stable profits and mature growth profiles.

The “right” PE ratio for a stock is about more than just today’s numbers. If a company is growing earnings quickly or is seen as less risky, the market typically assigns it a higher PE multiple. Meanwhile, slow or unpredictable growth, or elevated risks, usually mean a lower PE ratio is justified.

Currently, Bank of America trades at a PE ratio of 13.8x. This is slightly above the industry average of 11.2x and peers’ average of 13.2x. Simply Wall St’s proprietary Fair Ratio for Bank of America, which incorporates factors like growth outlook, profit margins, risk, industry norms and market cap, stands at 15.9x. This tailored benchmark is often more insightful than a straightforward comparison with industry or peer averages because it highlights the unique characteristics that set the company apart.

With Bank of America priced below its Fair Ratio, the stock appears undervalued by this approach, even if it is slightly ahead of the industry at large.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Bank of America Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is your own, easy-to-build story about what you think will happen to a company’s financial future. It is more than just plugging in the numbers; it is deciding what you believe about Bank of America’s revenue, profit margins, and risks, and then seeing how those beliefs impact Fair Value.

Unlike traditional models, a Narrative links a company’s story, such as "Bank of America will cut costs and digitalize, but lending will stay flat" or "Loan growth and rising rates will help profits soar," directly to a forecast and then seamlessly to a calculated fair value. Narratives make this process simple, interactive, and dynamic, and are available to everyone on Simply Wall St’s Community page, where millions of investors already participate.

This means you can compare your own fair value to the current share price and see instantly if your story says to buy, sell, or wait, all while factoring in the latest earnings or news (since Narratives automatically update when major information changes).

For example, some Bank of America Narratives currently estimate a fair value as low as $43 and as high as $57, highlighting how different assumptions and perspectives, whether cautious or optimistic, can lead to dramatically different investment conclusions.

For Bank of America, we'll make it really easy for you with previews of two leading Bank of America Narratives:

🐂 Bank of America Bull Case

Fair Value: $57.23

Current Price vs Fair Value: 7.4% undervalued

3-year Revenue Growth Forecast: 6.6%

• Digital engagement and AI investments are expected to boost customer retention and revenue growth. Expanding into new markets is also expected to support future earnings.
• Strategic interest rate management and share buybacks are projected to enhance earnings per share and help maintain asset quality.
• Analysts' consensus price target is only 6% above the current share price, suggesting Bank of America is fairly priced based on current forecasts.

🐻 Bank of America Bear Case

Fair Value: $43.34

Current Price vs Fair Value: 22.4% overvalued

Revenue Growth Forecast: 10.6%

• While Bank of America holds a robust market position and benefits from higher rates, the stock is seen as overvalued compared to earnings-based valuation models.
• Risks include regulatory pressures, interest rate volatility, and the potential impact of large shareholders reducing their stakes, which could weigh on investor confidence.
• Overall, projections suggest limited upside unless strong loan and interest income momentum is sustained; otherwise, the current valuation is not supported by fundamentals.

Do you think there's more to the story for Bank of America? Create your own Narrative to let the Community know!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com