Let's take a look at Wells Fargo & Co. (WFC, Financial) and try to explain if this is an appealing investment opportunity when shares of the company are trading 10% above its 52-week low. Shares of the firm closed yesterday at $48.72, amassing a year-to-date loss of 9.1%.
Wells Fargo has assets of $1.8 trillion as of Dec. 31, and it is the fourth-largest bank in the U.S. The bank has several businesses such as banking, insurance, investment, mortgage and consumer. Wells Fargo has a dominant position and is the largest deposit institution. As a matter of fact, it can achieve faster growth in its loans based on them. The activity is done in several branches, where the company focuses on small formats. Moreover, the bank is well-positioned after the Fed has hiked the interest rate because the bank has a lower interest rate risk profile.
The bank is implementing a new format to its branches, which consist of smaller ones, about half the common size impacting in lower costs.
In the fourth quarter, total sales increased by 0.86% year over year to $22.64 billion. Earnings per share were $1.00 versus $1.02 a year earlier. During the past fiscal year, the bottom line was higher, earning $4.12 versus $4.10 in the previous year. This year, analysts expect an improvement in earnings ($4.25 versus $4.12).
Regarding valuation, the stock sells at a trailing P/E of 11.94x, trading at a discount compared to a median of 12.60x for the industry. To use another metric, its price-to-book ratio of 1.48x indicates a premium versus the sector average of 1.03x, while the price-to-sales ratio of 3.0x is above the sector median of 2.64x.
Looking forward, with a scenario of higher long-term interest rates and the U.S. economy recovering, it is probable that net interest income could grow at a faster pace than in the past. Moreover, the noninterest revenue lines are also growing, such as card fees and operating leases. Also, the bank's focus on cross-selling should help to reduce costs, while improving operations and maximizing revenue.
Final comment
Only the P/E ratio shows the company is cheap. The other two metrics indicate that the stock is relatively overvalued. The fact that billionaire Warren Buffett has upped his stake in the company in the last quarter of 2015 makes me feel more comfortable with a buy recommendation. In addition, George Soros (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Jim Simons (Trades, Portfolio) initiated new positions during the quarter.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
