Bank Of America: Life After The Settlement

Bank of America (NYSE:BAC) recently reached a settlement with the Department of Justice, the SEC and some states for a cool $16.65 billion -- which settle allegations that the bank had misled investors by misrepresenting the quality of their mortgage-backed securities.

The cash payment is $9.65 billion, with another $7 billion in the form of help to consumers for modify mortgages which are now currently underwater. That puts Bank of America's total settlement to nearly $75 billion, which is much higher than the other large settlements of $27 billion from JP Morgan Chase, $12 billion from Citigroup and $10 billion from Wells Fargo.

Assuming that the worst is behind us, Bank of America can now focus on becoming a more profitable bank. However, there's is likely some overhang from investors given the sizable settlement. Even still, investors have been rewarded nicely over the last three years thanks to Bank of America's steadily rising stock price.

Has justice been done?

The settlement is less punitive than it appears, where a substantial part of it is not in the form of cash. Very little of the cash is likely to find its way to compensate investors who lost money on the mortgage-backed securities. Moreover, none of the cash will go to states like Florida and Nevada which was the hardest hit by the sub-prime crisis and where house prices are still some 30% lower than the peak.

Instead, New York will receive $300 million because it has been more aggressive in chasing mortgage damages against the big banks. Some other states such as California and Illinois will also receive cash payments.

Warren Buffett: The Bank of America bull

Legendary investor Warren Buffett believes that Bank of America will start to generate major profits after settling legal battles. Battles that have sidetracked resources and distracted the attention of management.

Assuming the major legal issues are resolved, investors can invest on the underlying business fundamentals, which means a more justified valuation for Bank of America. Net income is expected to jump to $17 billion in the next year, which is the best growth since 2006 and compares with the $11.4 billion generated in 2013.

This won't be enough to outshine the largest bank in the U.S., JPMorgan Chase (NYSE:JPM), or the most profitable, Wells Fargo (NYSE:WFC), but should be enough to satisfy value focused investors in the banking space. Buffett inspired some confidence in the bank back in 2011 with a $5 billion investment, makes his firm the largest investor in the company with a paper profit of $6.3 billion to date.

Bottom line

The bank has just taken the first step to rewarding investors by increasing the dividend with the approval of regulators to $0.05 a share. The amount isn't huge but it is a 400% increase. The stock trades at just 80% of book value, but the likes of JPMorgan trades at 110%. Bank of America still looks to be one of the most enticing stocks in the banking sector that are still undervalued.

Macy's Still A Long-Term Investment

Macy's (NYSE:M) posted 2Q earnings that were $0.80 a share (missing $0.86 consensus) and revenues were $6.27 billion (marginally missing consensus). Shares are up 8% despite the miss. This comes as the company still expects full-year 2014 numbers to come in as previously expected.

Since we first covered Macy's back in December, shares are up close to 20%. At the time we put a $78 price target on the stock, suggesting there's still upside of 25% for the next six months. But it's worth noting that the stock still trades on the cheap, with a forward P/E of around 12 and PEG at 1.1 -- both at similar levels to where the stock traded in December. As we noted back then,

While the retail shoppers can often be fickle, especially when it comes to apparel, Macy's shoppers are tried and true. The company knows how to get shoppers in the door and keeps them coming back. It's tough to find something wrong with Macy's. It's doing a lot right, from inventory management to merchandise planning, and embracing technology.

Last quarter, its operating margin was up 30 basis points to 9.1%. This despite the fact that gross margin was down 40 basis points to 41.4%. This was the lowest gross margin since 2Q 2009. However, the company was able to leverage its SG&A from 33% of sales down to 32.3% last quarter.

Its sales growth for the quarter was 3.3% y/y, versus inventory growth of 1.1%. This marked the first positive sales-to-inventory ratio in five quarters. Payables came in at 76.4%, essentially flat y/y.

The stock still appears to be a compelling investment. It's a leader in the omni-channel setting and has a strong combination of in-store and IT capabilities. It also has a strong balance sheet; having boosted its dividend payment 50% last quarter and also buying back $520 million worth of shares, which puts its shares outstanding to only 65% of 2006 levels. We still have a long-term bullish thesis on the company.

John B. Sanfilippo Still Going At It

John B. Sanfilippo (NASDAQ:JBSS) managed to post fiscal 4Q earnings of $0.59 a share and revenues of $202.5 million. Net sales were up 14% y/y for the quarter and net income was up 18%, while EPS was up close to 16% y/y. Shares are up 47% since we first covered John B. back in September of last year. As we noted back then,

JBSS has plenty of room to grow the distribution of its Fisher and Orchard Valley Harvest brands. By adding new products and better packaging, the company can open up new distribution channels with more grocers and get more shelf space.

The company rolled out a national ad campaign at this time last year and its key nut brand Fisher, was the first company to sport a resealable vertical bag in the nut category. As the company noted with its earnings release, fiscal 4Q sales for Fisher nuts grew by 20% y/y.

With the run up in the shares, the stock isn't quite as cheap as when we first covered it. However, it still offers value. Its P/E is 14, P/S is 0.4 and EV/EBITDA is 7.1. Meanwhile, Diamond Foods trades at n/a, 1.0 and 18, respectively.