The Zacks Analyst Blog Highlights: Bank of America, MBIA, Blackstone Group, Fannie Mae and Activision Blizzard

May 08, 2013, 11:01 ET from Zacks Investment Research, Inc.

CHICAGO, May 8, 2013 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Bank of America Corporation (NYSE: BAC), MBIA Inc. (NYSE: MBI), The Blackstone Group (NYSE: BX), Fannie Mae (OTCBB:FNMA) and Activision Blizzard (Nasdaq: ATVI).


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Here are highlights from Tuesday's Analyst Blog:

BofA Settles MBIA Dispute

In an attempt to remove the vestiges of the financial crisis, Bank of America Corporation (NYSE: BAC) announced a comprehensive plan to settle its legal dispute with MBIA Inc. (NYSE: MBI). The 5-year-old legal dispute involved conflict over guarantees on commercial mortgage-backed securities (CMBS).

Terms of the Agreement

Under the terms of the agreement, BofA will pay nearly $1.6 billion in cash and give back $137 million worth of MBIA 5.70% senior notes (acquired through a tender offer in Dec 2012) maturing in 2034 to MBIA. Further, the company will provide a senior secured credit facility worth $500 million to MBIA Insurance Corp, MBIA's structured finance division.

Notably, BofA will get warrants to buy 9.94 million of MBIA shares at an exercise price of $9.59 per share. This represents approximately 4.9% of MBIA's current shares outstanding. Moreover, these warrants have to be exercised prior to May 2018.

Further, BofA will close the outstanding credit default swap (CDS) protection deal, which was purchased from MBIA on CMBS. In addition to that, all the pending litigations between the 2 parties will be resolved.

The agreement also states that BofA will pull out from the lawsuits challenging MBIA's restructuring. Similarly, MBIA has agreed to withdraw charges against BofA related to the quality of bonds underlying the guarantees on CMBS.

The agreement requires certain approvals from the New York State Department of Financial Services, which are expected to be received soon, following which all the terms of the deal will be executed. Moreover, The Blackstone Group (NYSE: BX) acted as a financial advisor to MBIA in relation to the settlement deal.

Impact on BofA's 1Q Earnings

As BofA has still not filed its quarterly report for the period ended Mar 31, 2013, with the Securities and Exchange Commission (SEC), these settlement charges will be adjusted with its first-quarter results. The settlement charges will lower the company's earnings, while leading to an improvement of its capital ratios.

As a result of the settlement agreement, the litigation charge will lower BofA's first-quarter net income to $1.5 billion or 10 cents per share. On Apr 17, while announcing the first-quarter results, the company reported net income of $2.6 billion or 20 cents per share.

Notably, BofA's estimated Tier 1 common capital ratio under Basel III as of Mar 31, 2013, rose by 10 basis points to 9.52%. This reflects reduction in risk-weighted assets (RWAs) related to the terminated CDS contracts, partially offset by extra litigation costs.

Still a Long Way to Go

For MBIA, the settlement will do away with many obligations to guarantee regular principal and interest payments on commercial real estate related bonds, which could again default under the current economic scenario. The deal also clears the big hindrance that lay in its way of restructuring.

For BofA, the settlement agreement is another positive step in resolving its legal and legacy issues. The company has been facing many lawsuits, some of which are related to the sale of mortgage backed securities by Countrywide Financial – acquired in 2008.

In Jan 2013, BofA announced nearly $11.6 billion worth of settlement with Fannie Mae (OTCBB:FNMA) to end its mortgage related problems. Further, in 2011, the company had reached an $8.5 billion settlement deal with the private investors who had brought those risky MBS.  

We believe that the settlement deal will go a long way to improve BofA's overall efficiency. The company has been striving hard to regain its past glory. For this, it has announced several initiatives that are now bearing fruit. All the initiatives will lead to enhanced financial performance going forward.

Currently, BofA carries a Zacks Rank #3 (Hold).

Will Activision's Earnings Miss Estimates?

Activision Blizzard (Nasdaq: ATVI) is set to report first quarter 2013 results on May 8. Activision reported fourth quarter earnings of 75 cents, which surpassed the Zacks Consensus Estimate by 6 cents. Let's see how things are shaping up for this announcement.

Growth Factors this Past Quarter

A strong jump in top-line growth based on solid performance from the Call of Duty and Skylanders franchises were the main forces behind the comfortable beat. Additionally, operating expenses declined in the quarter that pushed up operating margin by 760 basis points ("bps").

Activision plans to launch a number of games based on its four franchises - Call of Duty, Skylanders, World of Warcraft and StarCraft. However, Activision remains cautious on fiscal 2013 due to volatile macroeconomic environment coupled with uncertainly related to console transition and tough year-over-year comparisons.

Earnings Whispers?

The Zacks Consensus Estimate for the first quarter stands at 9 cents while that for fiscal 2013 stands at 76 cents.

Activision posted positive surprises in the last four quarters with an average surprise of 110.94%.There were no estimate revisions for both the first quarter and fiscal 2013 over the past 30 days. As a result, the Zacks Consensus Estimate for both periods has remained unchanged.

The chances of a big surprise are unlikely given the lack of catalysts during the quarter. The stock carries a Zacks Rank #3 (Hold).

We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

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