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Inside Wall Street

Banking on Bank of America

Most investors remain spooked by the financial crisis as banking stocks continue to reel despite multiple efforts by the Fed and Treasury to chart and coordinate massive rescue operations. Even so, this may be an opportune time to snap up stock in Bank of America (BAC), which has been pummeled along with other bank stocks. "Lots of fear out there, but there's a lot of value in Bank of America," says Stuart Plesser of Standard & Poor's (MHP), who rates BofA a buy.

The stock has been in a downward spiral since it hit 47 last Dec. 11. Now at 15.05, it should climb to 25 in 12 months, figures Plesser. While risks still abound, he says, such as a further deterioration in the credit markets and the possibility of onerous government terms in connection with its Troubled Assets Relief Program (TARP) capital infusion, there are favorable factors that investors are disregarding: BofA has never suffered a loss in any quarter, notes Plesser, which shows financial stability. And the Sept. 15 acquisition of Merrill Lynch (MER) for $50 billion in stock is a "long-term positive" because it opens up cross-selling opportunities and adds as many as 20,000 financial advisers.

Meredith Whitney of Oppenheimer (OPY), who rates BofA "market perform," notes that Merrill's wealth-management business is second to none, with $1.6 trillion in client assets. It will augment BofA's wealth assets of $589 billion. Merrill's purchase, she says, meets BofA CEO Kenneth Lewis' key demands for acquisitions: brand, scale, and a best-in-class franchise.

Bank of America's recent purchases, including Countrywide Financial in July 2008 for $2.5 billion, make the bank into a "retail financial powerhouse of unrivaled proportions," according to George Putnam, editor of The Turnaround Letter. He says he remains bullish on the stock even after BofA cut its dividend by 50% in October. Its current dividend yield of 7.8% is still very attractive, Putnam says.

Theresa Brophy of Value Line (VALU) thinks one good thing about BofA is that it is experiencing strong inflows as depositors seek a safe haven for their funds. That has helped boost interest income by 33% in the third quarter, she notes. The road ahead for the stock may be bumpy, Brophy warns, but it has a "decent recovery potential to 2011-13."

BofA is cheap, says S&P's Plesser, selling at just 5.1 times his 2009 profit forecast of $2.35 a share (exclusive of merger costs), its lowest in at least 10 years. And based on his 12-month price target of 25, the stock would have a price-earnings ratio of 10. BofA's p-e ratio last year ran up to as high as 16. Plesser's profit estimate for 2008 is $1.54 a share, down from 2007's $3.30.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

A Brighter Smile at Nobel Biocare?

The recession is drilling even into the dental equipment business. Switzerland's Nobel Biocare Holding (NBHGF) posted disappointing third-quarter results despite its improving revenue momentum before the downturn started.

The shares, which trade on the Swiss Stock Exchange, fell to 14.10 on Dec. 3, from 43 in June. JPMorgan Chase's (JPM) Thomas Jones says Nobel is a long-term bet on the company's current restructuring, led by Domenico Scala, who took over as CEO in September 2007. Jones reports that Nobel has a "revolutionary" new dental implant that can be done in just hours. Also, Nobel's computer-aided system makes customized dental crowns and bridges.

Business in Asia continues to grow at a double-digit pace, says Jones. He sees Nobel earning $1.40 a share in 2010, up from $1.11 in 2009, and $1.01 in 2008. Jones' price target: 19.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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