Bank of America and Summerworks: Both on the road to recovery?

Benj Gallander and Ben Stadelmann
Friday, July 15, 2011

Back in the days before our moniker was The Contra Guys, we started a theatre festival with three friends called SummerWorks. The event, which ran for 10 days and featured 28 groups, proved an immediate success and has since expanded to 40 theatre companies, along with a Music Series component.

As Benj stated at the recent benefit to raise funds for the festival to kick off its 21st year, “If the festival were a person, now it could legally drink in California.” Perhaps California should lower the drinking age to stimulate the economy!

Unfortunately, the festival recently lost funding from the Department of Canadian Heritage. That amount, almost $50,000, represented about 22 percent of SummerWorks’ budget. It appears that the this backing was withdrawn primarily because of controversy surrounding the play Homegrown, about a member of the Toronto 18 terrorist group. Prime Minister Stephen Harper took umbrage with the play, stating he was “extremely disappointed that public money is being used to fund plays that glorify terrorism.” Not that he actually saw it.

After the funding cut, Finance Minister Jim Flaherty said, “One thing I’d say, and maybe it’s different than it used to be, is we actually don’t believe in festivals and cultural institutions assuming that year after year after year they’ll receive government funding. They ought not assume entitlement to grants.”

Sure, no group has an intrinsic right to a government subsidy, but it would be more appropriate if the Department of Canadian Heritage gave advance notice that funding would be eliminated. Better yet would be if it was gradually reduced. Getting rid of such a big piece of a budget in one swoop endangers a festival that provides jobs for both established and upcoming artists, while appealing to the diverse audience fabric that is Toronto. Plus, some of these plays make their way across Canada.

Over the past few years, governments in both Canada and the United States have had an essential hand in rescuing enterprises in various sectors. Two key ones have been automotive and financial. Jobs in these areas are critical to the quality of life of North Americans. But so are those in the cultural sector. Perhaps that is not so obvious.

While once inhabiting the world of small theatre, we now live in the world of commerce. Two huge companies on our radar screen, both of which benefited from the largesse of the American government, are Citigroup and Bank of America.

Benj purchased Citigroup in June 2009 at $3.36 during the heart of the financial crisis. The thesis was that this was a recovery play, a company that the American government would not allow to go under. While the hypothesis could have proven incorrect, Citi does appear to be mending. And while Benj continues to like the long-term prospects, when the enterprise announced a 1-for-10 stock consolidation in March of this year, he decided to throw in the towel.

Probability dictates that the vast majority of corporations that do a consolidation will have a lower stock price in a year’s time. So as a rule, Benj analyzes how he can get a return of a few percent more before selling. In this case, the sale price was $4.41, an equivalent of $44.10 to today’s price, for a reasonable return of 31 percent. Currently, the stock trades around $39.50. It is being watched simply out of interest, to see if it follows the normal pattern of being at a lower price next March.

Bank of America is another kettle of fish. Currently trading in the $10.25 range, this one is being viewed as akin to General Electric, an outfit acquired at $15.56 in December 2009 for the President’s Portfolio. A major part of the thinking here was that as GE recovered, the dividend that had been slashed would be increased.

Since being bought, that has happened twice, feeding the stock price recovery. More upside is projected, with a target price of $35.24 and a likely increase in the dividend at least one more time before the end of 2012.

BAC currently pays a dividend of a penny a quarter, but it would be a major surprise if this is not at least tripled in the next year or so. Along with that, this corporation, which reported a loss of almost $3.6 billion in fiscal 2010, will likely return to black ink on a regular basis. The first-quarter profit of better than $1.7 billion is an initial step on the recovery path.

Besides the improvement in the bottom line, the enterprise’s balance sheet has been enhanced. The long-term debt has been pared significantly since 2008, and the cash balance has been fortified. Plus, overall, the takeovers that the company made during the heart of the financial crisis should ultimately bode well. This both diversifies the bank’s offerings and adds revenues, some of which will eventually be reflected in the bottom line.

If BAC recovers as projected, it would not surprise us at all to see it quadruple from the current level. Don’t expect that to happen tomorrow, though. It will take patience and an improvement in the global economy.

While both of these banks now appear to be out of hot water, SummerWorks is in the midst of a fundraising drive to replace the lost government funding. Irrespective of how successful it is, the festival will be a feature of Toronto’s summer, running from August 4 to 14. If you have a chance to take in a play, it should both be entertaining and a chance to support the artistic community.