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Federico Flom
Federico Flom
Articles (110) 

Wells Fargo - Is the best stock to get US financial exposure ?

December 31, 2011 | About:

Wells Fargo & Company provides retail, commercial, and corporate banking services primarily in the United States. The company operates in three segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. It widely operates through its branches.

With the purchase of Wachovia, Wells Fargo has become a nationwide bank and was positioned itself among the top U.S. banks. The bank has $1.26 trillion in assets and 6,600 offices across the nation.

Wells Fargo is permanently boosting profits from its existing customer data base through cross-selling. Furthermore, it is considered a market-share leader in online banking and with the acquisition of Wachovia, it has reached a national scale.

The company´s management team is one of the most admired. With such a team and its nationwide profile, the bank has been able to take advantage of credit crisis.

Despite the economic recession, its earning power will enable the company to generate the needed capital by the end of 2012. Furthermore, it has passed government´s second round of stress tests and received permission to raise its quarterly dividend to 12 cents and initiate a stock buyback program.

Wells' risk profile has improved substantially since the depths of the global economic crisis.

CFO, Tim Sloan, has talked a bit about the company´s performance: “By focusing on meeting our customers' financial needs, we continued to generate very strong deposit growth and had the largest linked-quarter increase in loans in 11 quarters. And based on current business trends, we expect loan growth to continue.”

The bank is expected to save costs; nearly $1.5billion per quarter. However, if Wells Fargo does not meet this and other goals, returns could suffer quite a bit.

In terms of last quarter results, the company had record earnings of $4.1 billion. EPS have also reached the record of $0.72. In addition, the company is looking to improve its loan book by more than $8 million thanks to the strength in commercial and industrial lending.

Noninterest expense fell by about $800 million during the quarter and nearly $600 million from the third quarter of 2010, driven by lower employee benefits expense and a decline in other expenses.

In terms of valuation, WFC is trading in the low end of its valuations bads from P/E, P/S and P/B multiples. Indeed, WFC is trading with a P/E lowest than 10. If I would have asked you several years ago to buy these high quality bank at the current multiples every investor should place the majority of the portfolio in that opportunity.


What happens with the P/E also can be seen in P/S and P/B which are very low in comparison to what WFC traded in the past 10 years.

That is why, prominent Gurus have been accumulating WFC heavily at these levels. For example, Warren Buffett kept adding to his long term position while Lee Ainslie and Bruce Berkowitz initated an investment in the stock. There is no doubt that WFC is well seen by strong, fundamental oriented investors.


Warren Buffett in his 2010 Letter to shareholders said about Wells Fargo:

Wells Fargo, though consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength and earning power, has therefore been forced to maintain an artificially low payout (…) At some point, probably soon, the Fed’s restrictions will cease. Wells Fargo can then reinstate the rational dividend policy that its owners deserve.”

How is Wells Fargo managed?

CEO John Stumpf assumed the chairman role at the end of 2009. Wells Fargo has a strong culture and effective strategy,so Stumpf simply continued to execute a well-defined strategy and did not attempt to make its mark to the detriment of shareholders.

It is remarkable that the company is very shareholder-friendly. It has received a Stewardship Grade in that regard.

About the author:

Federico Flom
Equity Research Analyst

Rating: 2.8/5 (24 votes)


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