Is Bank of America's Stock Overvalued Or Undervalued?

Bank of America BAC shares have outpaced the S&P 500 in 2021, generating a year-to-date total of 48%.

Rising interest rates and economic expansion generate a favorable environment for big banks, but investors may be wondering just how much value there is left in Bank of America’s stock.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 33.4, more than double its long-term average of 15.9.

Bank of America’s PE is currently 14.8, less than half the S&P 500 average as a whole. Bank of America's PE ratio is also up 26.9% over the last five years, suggesting the stock is priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. Bank of America’s forward earnings multiple of 10.4 is still roughly half the multiple of the S&P 500 as a whole, making Bank of America stock look undervalued.

Bank of America’s forward PE ratio is even significantly lower than its financial sector peers, which are currently averaging a 14 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is about 0.9; Bank of America’s PEG is 0.6, suggesting Bank of America is significantly undervalued after accounting for its modest growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is 3.08, well above its long-term average of 1.62. Bank of America’s PS ratio is 8.02, more than double the S&P 500 average.

Finally, Wall Street analysts see little value in Bank of America stock over the next 12 months. The average analyst price target among the 23 analysts covering Bank of America is $44, suggesting about 1.2% downside from current levels.

The Verdict: At today's price, Bank of America stock appears to be reasonably valued based on a sampling of common fundamental valuation metrics.