Wells Fargo & Company ( WFC ) is scheduled to report its first quarter 2012 results before the market opens today. The Zacks Consensus Estimate for the quarter is 73 cents per share, representing an estimated year-over-year growth of about 9.5%.
We expect Wells Fargo to report a decent number this quarter but not a stellar one. We think that with solid fundamentals and strategic acquisitions, the company would benefit from an economic improvement, though a tepid one, and a somewhat upbeat borrower sentiment. However, with moderate growth in loans and a low interest rate environment, we think any extraordinary earnings figure would be elusive this quarter.
Considering the current economic environment, the recent trends in the credit metrics and the company's efforts to improve its credit quality, we expect additional reserve releases by Wells Fargo. However, the pace of improvement in credit quality is projected to be slow as portfolio quality approaches a stable, more normal level.
Notably, Wells Fargo passed the stress test of the Federal Reserve with flying colors in March. The company also enhanced its shareholder wealth by almost doubling its dividend.
Previous Quarter Performance
Wells Fargo's fourth quarter 2011 earnings of 73 cents per share were a penny ahead of the Zacks Consensus Estimate. Results improved from earnings of 72 cents per share in the prior quarter and 61 cents per share in the year-ago quarter.
Quarterly results were driven by a higher top line and improved credit quality, along with strong capital ratios were positives during the reported quarter. However, increased operating expenses were on the downside.
Fourth quarter net income applicable to common stock came in at $4.1 billion, modestly in line with the prior quarter and up from $3.4 billion in the prior-year quarter.
For full year 2011, Wells Fargo's net income applicable to common stock was $15.9 billion or $2.82 per share, up 28% year over year. Earnings per share for the full year also surpassed the Zacks Consensus Estimate by a penny.
The quarter's revenue of Wells Fargo came in at $20.6 billion, which was above the Zacks Consensus Estimate of $20.1 billion and up 5.1% sequentially. For the full year, revenue was $81.0 billion, down 4.9% from $85.2 billion in 2010. However, this compares favorably with the Zacks Consensus Estimate of $80.5 billion.
Wells Fargo reported a reserve release of $600 million (pre tax), attributable to improved portfolio performance. The company also expects future reductions in the allowance should the economy improve significantly.
Earnings Estimate Revisions - Overview
Ahead of the earnings release, we notice a bullish trend in the estimate revisions. The Zacks Consensus Estimates for the first quarter and full year 2012 have been revised upward. However, the magnitude of such revisions suggests that despite being bullish, the trend is not a very robust one.
We will now discuss the details of earnings estimate revisions to substantiate why short-term investors should be somewhat buoyant on this stock.
Agreement of Estimate Revisions
The estimate revision trend confirms that the majority of analysts are apprehending a somewhat stable first quarter for Wells Fargo. Of the 23 analysts covering the stock, 2 have increased their estimates for the first quarter, while none has moved in the opposite direction over the last 7 days.
Also, for full-year 2012, there were 2 upward estimate revisions and no downward movement. For full-year 2013, 2 upward revisions were witnessed again while none moved south over the last 7 days.
Magnitude of Estimate Revisions
We notice a somewhat positive trend in the earnings estimate revisions but the magnitude of such revisions was small in the last 7 days. The Zacks Consensus Estimate for the first quarter remained flat at earnings per share of 73 cents. For full-year 2012, the estimate increased 1 cent to $3.24 per share. In addition to this, the Zacks Consensus Estimate for full-year 2013 went up 1 cent to $3.64 per share over the last 7 days.
Wells Fargo's performance has been somewhat stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 1.4%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
The estimate revision trend indicates that some fresh investment in this stock will be a good decision, at least in the short run, given the slight potential for upside pressure on the stock.
Moreover, we believe that over the long term, investors should not be disappointed with their investments in Wells Fargo given its diverse geographic and business mix which enables it to sustain consistent earnings growth. Going forward, we believe that strategic acquisitions will help expand Wells Fargo's business and improve its profitability.
Though the Wells Fargo stock is not undervalued at this moment, we believe that long-term investors, who can absorb the risks related to economy and regulations, can expect a decent growth in Wells Fargo's earnings in future. Solid capital levels, expense management as well as improved credit quality will also support its profit figures.
Moreover, following the approval of the capital plan by the Federal Reserve, Wells Fargo has hiked its dividend by 10 cents to 22 cents per share. The capital plan also includes an increase in share repurchase activity in 2012 compared with the prior year. It also incorporates selective redemptions of trust preferred securities that no longer count as Tier 1 Capital under the Dodd-Frank Act. Such efforts have a positive impact on the stock price.
Yet, we believe the top-line headwinds would persist, given the protracted economic recovery. Plus, a low interest rate environment would keep its margin under pressure. Wells Fargo's unrelenting legacy mortgage issues also remain a concern. With the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble.
Going by estimate revision trends and the magnitude of revision, there is admittedly an upward pressure, though slight, on the shares over the near term. Wells Fargo shares maintain a Zacks #2 Rank, which translates into a short-term Buy rating.
However, after reviewing the company's business model and fundamentals, the recent acquisitions and the capital deployment efforts, we have a long-term Neutral recommendation on the stock.
Concurrent with Wells Fargo, JPMorgan Chase & Company ( JPM ) also kicks off the earnings season for the banking sector by reporting on April 13. Next in line is Citigroup Inc. ( C ) which will report on April 16, while Goldman Sachs Group Inc. ( GS ) will report on April 17 and Bank of America Corporation ( BAC ) on April 19.