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Highlights:
The intrinsic value of Bank of America Corp (NYSE:BAC), based on the Discounted Earnings model, is estimated to be $80.22.
The current trading price of Bank of America’s shares is significantly below the calculated intrinsic value, indicating a margin of safety of approximately 41%.
The GuruFocus DCF model uses EPS without NRI as the basis for valuation, as research suggests stock prices are more correlated with earnings than free cash flow.
Description:
Bank of America Corp's (NYSE:BAC) intrinsic value has been calculated using the Discounted Earnings model, a reliable method for estimating the true value of a company. The GuruFocus DCF calculator uses Earnings Per Share (EPS) without Non-Recurring Items (NRI) as the core metric for valuation, as studies show that stock prices tend to be more closely aligned with earnings rather than free cash flow.
As of November 26, 2024, Bank of America’s intrinsic value is estimated at $80.22, significantly higher than its current market price of $47.5. This discrepancy results in a margin of safety of approximately 40.79%, suggesting that the stock may be undervalued at its current price.
The DCF model utilized by GuruFocus follows a two-stage process. The first stage is the growth phase, where a higher growth rate is applied for a set period. In Bank of America’s case, the company is expected to grow at a rate of 18.60% for the first 10 years. This growth rate is based on historical EPS performance, with a cap of 20% to maintain a realistic and balanced estimate. In the second stage, known as the terminal stage, a more conservative growth rate of 4% is assumed for the following 10 years. The lower growth rate in the terminal stage reflects the natural slowing of growth that occurs after an initial period of rapid expansion.
The discount rate used in the calculation is 11%, which includes the current risk-free rate of 4.3% and an additional 6% risk premium for the stock market. By applying these assumptions, the intrinsic value of Bank of America is determined to be $80.22, indicating that the stock is currently trading well below its calculated value.
