Some quick P/E calculations for Bank of America(BAC)

I know it’s too early to take guesses at earnings, but I was wondering what the earnings would need to be to support a specific price. Now I know that future expectations factor a great deal into the price also. In other words, even if a company is not making money in the current quarter, as long as it is perceived that they “will be making money” in the future, there will be value placed.

Having said all this, we know BAC has 6.4 billions shares outstanding. If they make $6.4 billion in one year ($1.6 billion in the quarter), and we assign a conservative P/E ratio of 8, then a share price of $8 is appropriate.

So currently, the $8 share price is assuming (and this is critical), that without any high expectations, BAC earns $6.4 billion by the end of 2009.

Either increasing the earnings, or the P/E ratio will increase the share price. Ken’s hope of earning $30 billion in a future year would yield (assuming the same P/E of 8 ) a price of $37.50/share.

If the market has high expectations of BAC, the P/E can be driven up much higher than 8.

So I guess the 64,000 question is really, realistically, how much will BAC earn by the end of 2009?

I think many of us have been spoiled over the last few days to expect 20% daily price increases. Keep in mind that the larger institutions with billions of cash look for stability and good growth, not necessarily 20% daily increases. So because of this, I think, as long as BAC continues to “grow” predictably and steadily in earnings and expectations, we don’t need to worry about the potential investors “drying up.”

I would like to hear comments by anyone out there who is knowledgeable as to all these toxic assets we keep on reading about. On a high level, I think that this is what was the “monkey on BAC’s back” over the past couple months, right? The threat of this was what dragged the stock down, leading to the fear of nationalization. If, and it does appear so, FASB and the SEC are able to allow BAC to allocate these investments into different buckets, then what downside risk would be left? I don’t mean this to be a rhetorical question. I have to believe that there are other factors, although they will be minimized very shortly, that I have not considered. And if these factors are minimized, then does that mean BAC will rocket to earnings comparable to a couple years ago, OVERNIGHT??? This is mind-boggling.

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