Insider Buying: Cash(flow) is King for Bank of America Corporation (BAC) and Warren Buffet

Perhaps corporate investors believe their share prices are too high? Insider buying has slowed, big time. Last week’s total barely nudged above $1 billion with a little more than blue tickets. In the old days, when tickets had to be handwritten, buys were blue and pinkish-red for sales. At least, that was the way it was where I worked.

Take out the biggest buyer, more on him in a minute, and the grand total of insider purchases nosedives to just $243.5 million. That’s a nice Mega-Millions jackpot, but it is walk-around-money compared to most weeks.

The Rich Uncle Pennybags that spent more than $800 million is one of the richest uncles in the world, provided he is an uncle. Warren Buffet’s Berkshire Hathaway bought nearly 34 million shares of Bank of America Corporation (BAC) at an average cost of $23.99. ⁽¹⁾

Like you don’t know, but just in case, Bank of America provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments worldwide. The diversified financial services company has more than 66 million customers, serviced by 212,796 employees. ⁽²⁾

Buffet’s most recent BAC buy added to his pile of shares, now totaling more than 947 million shares. ⁽³⁾ That’s a lot, roughly 11% of the 8.66 billion outstanding Bank of America stock. His BAC stake is the highest total of shares and second largest holding by dollars (Apple owns the top dollar spot) that Berkshire holds for any company.

Anything that’s number one or two on Mr. Buffet’s list is worth our, collective attention. In the last year, shares of BAC traded as low as $17.95 and as much as $35.72. Wall Street sees a one-year price target of $28.52, which is 11.04% upside, not including the $0.72 (2.96%) current annual dividend. ⁽⁴⁾

We know Warren is big on cashflow and that could be one of the reasons he added to his Bank of America holding. BAC is valued at 6.6 times its cashflow, whereas the average peer trades at a much richer 9.13 times cashflow. Otherwise, the massive financial services company trades on par with its peers on a price-to-earnings (P/E), price-to-sales (P/S) and price-to-cashflow (P/Cf) basis.

But let’s see how investors currently price BAC compared to the company’s last five-years, maybe there is some value to be found?

In the last half-decade, BAC’s average P/E was 12.72. As we type, the multiple stands at 11.77 ⁽⁵⁾, a tiny discount. More in the same vein, shares are valued at just 11.98 times next year’s consensus earnings per share (EPS) estimate of $2.11. ⁽⁶⁾ There isn’t much a P/E discount.

Up the income statement we go, to the top floor, but the view is mostly the same, maybe worse. Revenue is forecasted to drop to $85.91 billion in 2021 from $86.46 billion this year. Since 2015, the bank has traded at an average of 2.37 times revenue. At 2021’s projected sales and the typical P/S ratio, Buffet is going to be looking at a $23.55 stock.

Cash is king and probably one of the main reasons for the Berkshire $800 million outlay. In the last five-years, Bank of America normally traded at 10.19 times its cashflow, which isn’t too far away from the current peer group number. As it stands now, BAC generates approximately $3.67 per share in cashflow, which prices out to $37.40 at the five-year average P/C ratio.

The Play: It’s hard to bet against Warren Buffet. However, he’s like the house in Las Vegas, happy to take a smaller cut on large, less-risky bets. Bank of America Corporation (BAC) offers limited upside based on its recent P/E and P/S histories. If Wall Street is willing to pay up for cashflow, then BAC would be far more attractive.

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