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Why Wells Fargo is a Better Bank than Bank of America, J.P. Morgan Chase or Citigroup?

October 23, 2008 | About:

In the midst of the recent market turmoil, banks in particular have been hit hard. However, there are some banks that have held strong to their success and Wells Fargo and Co. has stood out as one bank that can weather the storm and take the advantages of it.

Why Wells Fargo is a better bank? Because it is more conservative and consistent with its operation. Therefore the business has better predictability, and can weather the current turmoil market, and even benefit from it over long term.

Higher Predictability Rank

Well Fargo is the highest rated predictable company among the big banks. When we take a glance at Wells Fargo’s revenue and earnings charts, a 10-year compilation of data shows consistent and stable year-to-year growth. Wells Fargo has experienced a 9.7 percent revenue growth, as well as a 10.8 percent EBITDA (earnings before interest, tax, depreciation and amortization) growth in the last 10 years. A graph showing the growth trend for Wells Fargo is below.

Based on this 10-year compilation of financial data, we have rated Wells Fargo a 4-star Predictability Rank. (click here to learn more about Predictability Rank). This 4-star ranking places Wells Fargo close to the top of 2043 stocks traded from Jan. 2, 1998 to Aug. 31, 2008 that we have researched. Compared to other large banks such as JP Morgan, Bank of America, and Citigroup, which all fall within non-predictable, or 1-star predictability ranking companies, Wells Fargo is far outpacing the competition.

wfc.GIF


For comparison, the revenue and earning growths of other better run banks, Bank of America (BAC), and J. P. Morgan (JPM) is shown below. These charts clearly tell us that Wells Fargo is a better run bank.


bac.GIF

jpm.GIF

c.GIF


By the way, in the back testing for 1998-2008, only 8 percent of the 4-star stocks are still in loss if you bought them and hold for 10 years until August 2008. A 4-star company’s annualized median gain is 9.8 percent, which was 6.7 percent a year above the average of all stocks.

Non-Predictable Companies

On the other hand, 1-star companies are not predictable. Most 1-star companies have had at least one year of operating loss over the past 10 years. In the back testing for 1998-2008, 45 percent of the 1-Star stocks are still in loss. Their annualized median gain is 1.1 percent, which was 2 percent a year below the average of all stocks.

JP Morgan, Bank of America, and Citigroup have all fallen behind in their revenue and earnings growth in the last few years. Cumulatively, their 10 year growth has averaged 2.7 percent with JP Morgan lagging behind at a -2 percent growth, Bank of America at 5.5 percent growth, and Citigroup at 4.6 percent growth.

Their earnings growth has also fallen short to Wells Fargo’s, which is 14.1 percent over the last decade. Citigroup, Bank of America, and JP Morgan have experienced a 3.4 percent, 9.5 percent, and 1.3 percent earnings growth respectively. In other words, their revenue and earnings growth has been less than half that of Wells Fargo’s in the last 10 years. Because Wells Fargo is more effective than its competitors at managing its own performance, it does a more efficient job of managing its business operations.

At tough times like this year, Wells Fargo stocks also hold much better than the others. Year to date Wells Fargo stocks gained about 10%, while J. P. Morgan lost about 10%, and Bank of American lost more than 40%, and Citigroup lost more than 50%.

Warren Buffett Owns It and Is Buying More

Wells Fargo is a top holding of Warren Buffet who currently owns 290,654,868 shares, which is 8.78 percent of Wells Fargo shares outstanding. One of the main reasons Warren Buffet has stayed with the company is because of its highly predictable business model, and because it satisfies what he likes in a company.

Warren Buffett has said many times that the companies he likes are:

1. Simple businesses that he understands,

2. Companies that have predictable and proven earnings,

3. Companies with an economic moat, and

4. Those companies that can be bought at a reasonable price.

Wells Fargo easily fulfills all four categories, with the most important being its proven earning capacity. Warren Buffett mentioned in recent interviews that he is buying more of Wells.

In recent headlines, Wells Fargo has attained approval from the Federal Reserve to merge with Wachovia Corp. and all of its subsidiaries following an agreement to acquire the bank for $11.7 billion in stock. The deal was originally valued at $15.1 billion but Wells Fargo stock has declined since the acquisition was announced.

According to the Wall Street Journal, Wells Fargo is expected to experience a decline in net profits as the company’s prime-mortgage and credit card businesses begin to feel pressure from the weakening economy.

Therefore, although the market has seen declines in numbers that it has not seen for years, Wells Fargo has maintained a robust position within its industry and has experienced the least problems of its competitors. Most of its success can, again, be attributed to the company’s ability to operate conservatively and consistently.

Premium Members, go to list of predictable companies for the most predictable companies. You may also try Buffett-Munger Screener. If you are not a Premium Member, you are invited for a 7-day Free Trial.


Rating: 3.0/5 (24 votes)

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