Can Bank Of America Double After Resolving Legal Issues?

I've been bullish on Bank of America (BAC) since early in 2013, citing that I'm happy with the job current CEO Brian Moynihan is doing. I also am bullish on the bank due to their impressive earnings, likeliness of raising dividends in the future, and prudent cost cutting strategies.

Bank of America has served investors well over the last 12 months, returning slightly over 60%.

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There's a few caveats in going long on BAC, including interest rates and susceptibility to the housing market pulling back again. However, legal issues are generally looked at as one of the biggest current risk factors in investing in Bank of America . In almost all of my bullish articles, I made note of the fact that the banks outstanding legal issues tied to the subprime mortgage crisis and ensuing crash remain vulnerabilities for the bank.

On August 8th, roughly six months ago, I made the argument that BAC's legal woes shouldn't be too much of a worry, as the company seems to be knocking them out and settling them one at a time. As recently as last month, I continued to argue a bullish case on BAC, citing legal progress as one of four reasons that I would stay bullish.

This morning, BAC gave my argument a good shot in the arm, as it reported pre-market that it had solved and settled yet another outstanding legal liability.

Bank of America's press release stated:

Bank of America today announced an agreement with the Federal Home Loan Mortgage Corporation (Freddie Mac) to resolve all remaining representations and warranties claims for residential mortgage loans sold to Freddie Mac through the end of 2009.

Under terms of the agreement, Bank of America will pay Freddie Mac a total of $404 million (less credits of $13 million) to resolve all outstanding and potential mortgage repurchase and make-whole claims related to loans sold to Freddie Mac from January 1, 2000 to December 31, 2009, and to compensate Freddie Mac for certain past losses and potential future losses relating to denials, rescissions and cancellations of mortgage insurance. The payments are fully covered by existing reserves as of September 30, 2013.

The release then goes on to state that BAC has "resolved all outstanding and potential representations and warranties claims on whole loans sold by legacy Bank of America and Countrywide to Fannie Mae and Freddie Mac through the dates outlined above."

So, again, we see progress as BAC puts its head down and bludgeons its way through yet more legal issues. Once resolved and settled, they're no longer potential risks for the company.

With these issues being pushed aside, investors are going to be able to focus more on the company, its stock, and the relatively cheap valuation that Bank of America still has.

According to the company's last 10-Q filing from Q3 2013, the company had $232.3 billion in shareholder's equity and 10.6 billion common shares outstanding. That works out to a back of the napkin book value of almost $22/share. That means Bank of America, in the midst of restructuring and getting ready to "re-grow", up its dividend, and clean up its legal mess is trading at a discount of almost 25%.

Compared to other banks, Bank of America still trades at a sizeable discount to what the market is valuing other companies in the sector.

When the legal issues are completely resolved, it's likely that BAC will have continued to move in the right direction with cost cutting which could continue to bolster its bottom line, even if revenues remain stagnant for another quarter or two. CEO Brian Moynihan, backed by Buffet's investment in the company, continues to act swiftly and logically, with a firm grasp on the company's fundamentals. I remain bullish on Bank of America, impressed by Moynihan, and contend that BAC stock could easily still double from here going forward into 2014.

Best of luck to all investors.

Source: Can Bank Of America Double After Resolving Legal Issues?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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