Wells Fargo: The Resilient Turtle

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By Kyle Zhao and Adil Yousuf

Wells Fargo & Co. (NYSE:WFC), up 26.3% year to date, recently passed the Industrial & Commercial Bank of China Ltd. as the world's largest bank by market capitalization. Employing a rather traditional banking model, Wells Fargo enjoys the highly sought after attention of the Sage from Omaha himself. Comfortably occupying 22.6% of Berkshire Hathaway's investment portfolio, Warren Buffett has been steadily buying Wells Fargo since the real estate banking crisis of 1990. With CEO John Stumpf at the helm of a sound management team, Wells Fargo has enjoyed consistent earnings growth in the past four years, showing its quality against its peer group

The bank reported attractive results for Q2 2013. Bottom line grew 19.7% to $5.27 billion from $4.40 billion the previous year. This translates into 98 cents in EPS, topping the 93 cents forecasted by analysts. This marked the 14th consecutive quarter of EPS growth, an achievement few megabanks can claim.

With 40.6% of its loan portfolio in mortgages, Wells Fargo's recent performance can be attributed to rising home prices. However, this also means that the bank is highly exposed to current rising interest rates, which adversely impact the volume of mortgage originations as home buyers shy away. Conversely, as the fed eases out of its zero interest-rate policy, mortgage rates should rise at a quicker pace, thereby further contributing to Wells Fargo's profitability in the form of wider net interest margins.

Market IQ's proprietary Fundamental metrics give Wells Fargo an Outperform rating. Market IQ characterizes Wells Fargo as a high Quality, but average Value stock (see below).

For more insights, visit the Market IQ blog.

The above Quality - Value chart consists of the following companies: Wells Fargo & Co.(NYSE:WFC), JP Morgan (NYSE:JPM), Citigroup (NYSE:C), and Bank of America (NYSE:BAC).

The Company's Qualitative strengths can be seen in multiple areas such as EPS growth, Return on Equity (ROE), and Financial Strength.

 

  • The company has demonstrated a pattern of positive EPS growth over the past two years. Most recently for Q2 2013, Wells Fargo improved EPS by 19.7% when compared to Q2 2012.
  • ROE increased to 13.3% in Q2 2013 vs. 11.24% in Q2 2012.
  • Wells Fargo has an Equity-to-debt ratio of 0.13, which is higher than the industry average of 0.11, indicating strong Financial Strength relative to its peers. Additionally, Interest Coverage ratio of 6.6 is higher than the industry average of 3.1, indicating the firm's strong ability to meet its short-term obligations.

 

Based on Market IQ's Valuation metrics, Wells Fargo is fairly priced to its peer group (see below).

Note: The table shows capped priced multiples

 

While three large draft horses power the Wells Fargo stagecoach: commercial loans, mortgages, and brokerage advisory, the bank is making good headway in expanding its wealth management segment, as well as its credit card and investment banking divisions. The latter, though still a small proportion of the bank's total revenues (5%), generated fees in Q2 2013 that were 52% higher than the previous quarter and 85% higher than the same quarter one year ago. Since its merger with Wachovia, Wells Fargo has made strong efforts in expanding its investment banking team globally. With intentions to continue growing headcount by 10-20% annually, Wells Fargo Securities is expected to continue climbing the league tables. Furthermore, Wells Fargo's wealth management division, currently its fastest growing business segment, is evidently realizing the synergies of cross-selling to its established clientele.

Recently, Wells Fargo announced a deal with American Express to offer customers a brand new line of credit cards on the American Express(NYSE:AXP) platform. This is a large step towards reaching the aggressive goal announced by management earlier in the year regarding doubling its presence in the credit card market. This is a strong strategic play coming from Wells Fargo, especially given that credit card delinquency rates are at the lowest it has been since 1990.

Solidly planted as a US leader in traditional loans, Wells Fargo has a strong foundation from which to pursue the wealth of promising growth opportunities up ahead. Having always been associated with conservatism, the bank abstains from attempts to garner the fickle attention of the market. Despite shying from the spotlight, Wells Fargo is the resilient turtle that trudges onwards, and as the fable suggests, it stays true to the path of winning in the long run.

 

This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Earnings , Stocks

Referenced Stocks: AXP , BAC , C , JPM , WFC

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