Monday, March 03, 2008

Bank of America

Why did Buffett and BRK buy 8,700,000 shares of BAC between $48.34 - $50.14 per share?

BAC also buying Countrywide Financial. While Countrywide reported one in three of its subprime mortgages were delinquent at the end of 2007, and the company lost $422 million in the fourth quarter, BofA chief executive officer Kenneth Lewis has said Countrywide's financial results were consistent with the bank's due diligence and agreed-upon purchase price of $4 billion. The purchase will make Charlotte, N.C.-based BofA (NYSE: BAC) the nation's largest mortgage lender and loan servicer. The deal is slated to close in the third quarter.

Perhaps, my generated report below will also help you better understand this purchase.

Bank of America Corporation (Bank of America) is a bank holding company. Bank of America provides a range of banking and non-banking financial services and products through three business segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. In December 2006, the Company sold its retail and commercial business in Hong Kong and Macau (Asia Commercial Banking business) to China Construction Bank. In October 2006, BentleyForbes, a commercial real estate investment and operations company, acquired Bank of America Plaza in Atlanta from CSC Associates, a partnership of Cousins Properties Incorporated and the Company. In June 2007, the Company acquired the reverse mortgage business of Seattle Mortgage Company, an indirect subsidiary of Seattle Financial Group, Inc.

Bank of America, BAC has a (5-year annual average) net income growth rate of 9.87 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does BAC have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.

BAC has a current market price is 38.84 Using an assumed growth rate of 7 percent, the estimated Intrinsic Value is 92.89 per share from, and this may or may not indicate a bargain of 54 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .42 , and a possible margin of safety of 58 percent.

The current price/earnings ratio = 12.It's current return on capital = UnavailableUsing a debt to equity ratio of 4.16, Bank of America shows a current return on equity = 10.8

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Automatic Warning, ( above 0.5 ) on this current debt to equity level of 4.16

Does Bank of America make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is BAC the best place to invest our money today?

What about growth in Free Cash Flow?
Excerpts, comments, and news items:

Portions of this report are generated in budlab software on 08-03-03 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision.

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