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Stock Analyst Update

Better Days Likely Ahead for Wells Fargo

The bank is still looking to regain its footing, but the pessimism surrounding the stock is an opportunity for investors.


Wide-moat  Wells Fargo's (WFC) second quarter results were not the best, as net income per diluted share was down almost 9% year over year, largely due to weak noninterest income and increasing noninterest expenses. 

There were losses of $619 million during the quarter due to a multitude of factors, including $171 million related to the foreign exchange business and $114 million related to fee calculations in fiduciary and custody accounts. This was better than last quarter’s operating losses of nearly $1.5 billion and over $3.5 billion in the fourth quarter of 2017. While the bank is headed in the right direction, it isn’t quite out of the woods yet. There was another lawsuit filed against the bank in late June regarding its financing practices with merchants. Needless to say, the bank is still sorting through a number of issues. 

This has all led to some pessimism surrounding Wells Fargo, something that is rare in the banking industry today. While current results are not the best, the bank still managed to generate a 10.6% return on equity during the quarter and a 12.6% return on tangible common equity. This is still well within the range of our current 2018 estimates, and we aren’t currently projecting any substantial growth in revenue or expansion in return on equity through the end of 2019. 

Despite these conservative estimates, the bank is still roughly 15% undervalued compared with our fair value estimate of $65, which we are maintaining. If the company is able to meet its cost-cutting goals by 2020, both efficiency and returns on capital should improve significantly, which would easily justify our fair value estimate of $65 (just under 2.1 times tangible book value). Wells Fargo’s dividend yield of around 3% adds to the stock’s attractiveness, and the bank’s sizable excess capital amounts should encourage even more capital returns from the bank. All of these factors should support the stock’s value over the medium term.

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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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