Permanent Destruction of Shareholder Value
Recent Stock Price Performance of BAC relative to its peer group indicate that the market is concerned about potential earnings dilution from recent acquisitions as well as the prospect of needing to raise additional capital.
Shown in Percentage of Value lost, we compare Bank of America’s stock price performance against a range of large capitalization companies.
While it is difficult to forecast future earnings as well as long term earnings potential, Bank of America’s management has failed to grow one measure of intrinsic value – tangible book value per share. The chart below shows that tangible book value per share – whether including or excluding mortgage servicing rights as part of capital – has fallen as a result of costly acquisitions that have destroyed tangible book value over time.
Bank of America – Stated Book Value per Share vs Tangible Book Value per share
The chart below further illustrates the difference between reported net income over the past five (5) years from 2003 to 2008 vs. the change in tangible common equity over the same period. As you will note, even though the company reported over $81 BN in net income from 1/1/2003 to 12/31/08, tangible common equity grew by only $11 BN (or $159 Million excluding Mortgage Servicing Rights as capital) over the same 5 year period.
The chart also highlights the massive goodwill and intangibles created over the same period caused by overpriced acquisitions. Although we are not forensic accountants, this chart (in our opinion) also raises the question of the quality of earnings recorded over the time period in question.
The recent acquisitions of Countrywide and Merrill Lynch have eroded tangible capital and ballooned the balance sheet of Bank of America. The net effect of these acquisitions has been to reduce Bank of America’s cushion of tangible capital to one of the lowest levels in the industry. This reduces the bank’s perceived ability to absorb future loan losses in the future without the need to raise additional capital, and we believe is one of the primary reasons for the currently depressed stock price.