Your SlideShare is downloading. ×
BAC - Expect Upside Following Investor Day
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

BAC - Expect Upside Following Investor Day

150

Published on

Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund …

Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
150
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Equity ResearchEquity Derivatives Equity Linked StrategiesDevapriya Mallick 1.212.526.5429 dmallik@lehman.comRohit Bhatia 1.212.526.0367 rbhatia@lehman.comRyan Renicker 1.212.526.9425 ryan.renicker@lehman.com February 21, 2007BAC – Expected Upside Following Investor DayBullish in the Medium TermIn the recent past, shares of BAC have underperformed its peers (JPM, C), possibly on account of the departure of its CFO,persistent merger speculation (12/7 Reuters article titled “Barclays climbs on talk of bid approach” & 1/27 FT article titled “BofAand Countrywide in alliance talks”) and asset quality concerns. BAC will be hosting an investor day on Feb. 26-27. Lehman’sLarge-Cap Banks analyst Jason Goldberg expects the company to reiterate that it expects to remain disciplined on the M&A frontand to highlight organic growth opportunities1.BAC trades at the lowest multiple in our banks coverage universe (Figure 1) and has continued to trade at a forward P/E discountin spite of MBNA integration issues abating. An up-beat investor day could allow BAC shares to outperform its group, in ouranalyst’s view.In a low volatility environment, implied volatility for some of the largest S&P 500 constituents appears cheap in absolute terms. 3-month implied volatility for BAC closed at an all time low last night (Figure 2). This is partly explained by the fact that the stockhas realized just over 10% volatility over the last 6 months.With the decline in front-month vols, BAC’s term structure looks fairly steep. 3-month implied volatility has been trading at analmost 3 point discount to 12-month vols for the last few weeks.Figure 1: BAC Cheap Relative to Peers Based on Fwd P/E Figure 2: 3-Month Implied Vol At All-Time Low 15 22% BAC BAC 3-month Implied Vol 14 C 20% BAC 12-month Implied Vol JPM 18% 13 16% 12 14% 11 12% 10 10% 9 5 6 05 5 06 6 5 6 -0 -0 -0 -0 -0 -0 g- g- ay ay ov ov b b Au Au Fe Fe 4 4 5 5 6 6 4 5 6 04 05 06 07 M M N N r-0 -0 r-0 -0 r-0 -0 l-0 l-0 l-0 n- n- n- n- ct ct ct Ju Ju Ju Ap Ap Ap Ja Ja Ja Ja O O OSource: Lehman Brothers, Factset Source: Lehman Brothers1 Please see Bank of America Investor Day Preview: Due for a Bounce?, Jason Goldberg, February 16, 2007 for additional detailson the fundamental thesis.Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflictof interest that could affect the objectivity of this report.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them,where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 3.
  • 2. BAC – Expected Upside Following Investor Day February 21, 2007Trade IdeaFor investors who own BAC, a low cost means of adding to their long position is to purchase the May07 55 calls for $0.85 andfund them by writing the Jan08 60 calls for $0.80. This spread costs only about $0.05 because of the low volatility implied by Mayoptions, while providing exposure to any potential near-term upside in BAC. As of the January 18, 2008 expiration for the shortleg, any upside beyond the $60 strike for the short leg would be sold away – this would represent more than 11% returns fromcurrent levels.Alternatively, investors looking to initiate a long position in the stock can buy the May07 55 calls outright. The $0.85 premiumrepresents about 1.6% of BAC’s closing price as of last night and is a very low premium for an at-the-money option with threemonths to expiration. 2
  • 3. BAC – Expected Upside Following Investor Day February 21, 2007Analyst Certification:I, Devapriya Mallick, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subjectsecurities or issuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this email.Important DisclosuresLehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this email communication.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at nocost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN torequest a copy of this research.Investors should consider this communication as only a single factor in making their investment decision.The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion ofwhich is generated by investment banking activities.Stock price and ratings history charts along with other important disclosures are available on our disclosure website at www.lehman.com/disclosuresAnd may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM, 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK,NY 10019Options are not suitable for all investors and the risks of option trading should be weighed against the potential rewards. Supporting documentsthat form the basis of the recommendations are available on request. Please note that the trade ideas within this report in no way relate to thefundamental ratings applied to European stocks by Lehman Brothers Equity Research. Prior to buying or selling an option, an investor mustreview a copy of Characteristics and Risks of Standardized Options (ODD).Mentioned StocksBank of America (BAC - USD54.05) 2-Equal weight / Positive A/D/J/K/L/MRisks Which May Impede the Achievement of the Price Target: Integration risk from Fleet merger and the possibility of more large acquisitions in the future.Reliance on market-sensitive activities for a portion of fee income (investment banking, trading, equity investments). Securities gains are expected to declinefrom the high level of 1H04. BAC faces litigation risk related to its exposure to Parmalat and Worldcom.Disclosure Legend:A: Lehman Brothers Inc. and /or an affiliate managed or co-managed within the past 12 months a 144A and/or public offering of securities for this company.D: Lehman Brothers Inc. or an affiliate has received compensation for investment banking services from the subject company within the past 12 months.J: Lehman Brothers Inc. or an affiliate trade(s) regularly in the shares of the subject company.K: Lehman Brothers Inc. has received non-investment banking related compensation from the subject company within the last 12 months.L: The subject company is or during the past 12 months has been an investment banking client of Lehman Brothers Inc. and/or an affiliate.M: The subject company is or during the last 12 months has been a non-investment banking client (securities related services) of Lehman Brothers Inc.Guide to Lehman Brothers Equity Research Rating SystemOur coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below)relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”).To see a list of companies that comprise a particular sector coverage universe, please go to www.lehman.com/disclosures.In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (seedefinitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read theentire research report including the definitions of all ratings and not infer its contents from ratings alone.Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investmenthorizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-monthinvestment horizon. 3
  • 4. BAC – Expected Upside Following Investor Day February 21, 20073-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investmenthorizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certaincircumstances including when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company.Sector View1-Positive - sector coverage universe fundamentals are improving.2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals are deteriorating.Distribution of Ratings:Lehman Brothers Equity Research has 2001 companies under coverage.42% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 39% of companies with this ratingare investment banking clients of the Firm.41% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 28% of companies with thisrating are investment banking clients of the Firm.13% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 23% of companies with thisrating are investment banking clients of the Firm.This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has beenapproved by Lehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in theEuropean Economic Area. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. Thismaterial is distributed in Australia by Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Inc., Singapore Branch. (“LBIS”). Wherethis material is distributed by LBIS, please note that it is intended for general circulation only and the recommendations contained herein does not take intoaccount the specific investment objectives, financial situation or particular needs of any particular person. An investor should consult his Lehman Brothers’representative regarding the suitability of the product and take into account his specific investment objectives, financial situation or particular needs before hemakes a commitment to purchase the investment product. This material is distributed in Korea by Lehman Brothers International (Europe) Seoul Branch.This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or otherinstruments mentioned in it. No part of this document may be reproduced in any manner without the written permission of Lehman Brothers. With theexception of disclosures relating to Lehman Brothers, this research report is based on current public information that Lehman Brothers considers reliable, butwe make no representation that it is accurate or complete, and it should not be relied on as such. In the case of any disclosure to the effect that LehmanBrothers Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company, the computation of beneficialownership of securities is based upon the methodology used to compute ownership under Section 13(d) of the United States Securities Exchange Act of1934. In the case of any disclosure to the effect that Lehman Brothers Inc. and/or its affiliates hold a short position of at least 1% of the outstanding sharecapital of a particular company, such disclosure relates solely to the ordinary share capital of the company. Accordingly, while such calculation representsLehman Brothers’ holdings net of any long position in the ordinary share capital of the company, such calculation excludes any rights or obligations thatLehman Brothers may otherwise have, or which may accrue in the future, with respect to such ordinary share capital. Similarly such calculation does notinclude any shares held or owned by Lehman Brothers where such shares are held under a wider agreement or arrangement (be it with a client or acounterparty) concerning the shares of such company (e.g. prime broking and/or stock lending activity). Any such disclosure represents the position ofLehman Brothers as of the last business day of the calendar month preceding the date of this report.This material is provided with the understanding that Lehman Brothers is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion ofLehman Brothers and are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries,and they may not be suitable for all types of investors. If an investor has any doubts about product suitability, he should consult his Lehman Brothersrepresentative. The value of and the income produced by products may fluctuate, so that an investor may get back less than he invested. Value and incomemay be adversely affected by exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product isincome producing, part of the capital invested may be used to pay that income. © 2007 Lehman Brothers. All rights reserved. Additional information isavailable on request. Please contact a Lehman Brothers entity in your home jurisdiction.Lehman Brothers policy for managing conflicts of interest in connection with investment research is available at www.lehman.com/researchconflictspolicy.Ratings, earnings per share forecasts and price targets contained in the Firms equity research reports covering U.S. companies are available atwww.lehman.com/disclosures.Complete disclosure information on companies covered by Lehman Brothers Equity Research is available atwww.lehman.com/disclosures. 4

×