Wells Fargo Delivers Growth

2/11/2013


  Recent Price
$35
  Dividend
$1.00
  Yield
2.9%
  P/E Ratio
10
  Shares (millions)
5,339
  52-Week Price Range
$36.60 - $29.80

Wells Fargo ($35; WFC) averaged $928.8 billion in deposits in the December quarter, up 7% from a year earlier. The bank's results primarily rely on the activity of small business and consumers, rather than trading activities.

The S&P 1500 Financial Sector Index, the broader index's worst-performing sector in 2011, delivered a total return of 27% last year to lead all sectors. In the wake of that rally, the median stock in the sector has a trailing price/earnings ratio of nearly 16.

Wells Fargo shares performed roughly in line with their sector in 2012. But unlike many other financials, Wells Fargo still looks cheap, trading at 10 times trailing earnings. The stock appears less attractive relative to book value, perhaps because investors expect more big write-downs on assets held by lower-quality banks.

The consensus sees Wells Fargo growing earnings per share 8% to $3.64 in 2013. If Wells Fargo's P/E returns to the three-year average of 12 — still well below the banking-industry median of 14 — and the company meets the 2013 consensus profit estimate, the stock will advance 24% in the coming year. Wells Fargo is a Focus List Buy and a Long-Term Buy.

Business breakdown

Wells Fargo expanded net income at all three of its segments last year. Operating in all 50 states, the community-banking unit (54% of 2012 net income) sells mortgages and home-equity loans, as well as a variety of products geared toward consumers. Net income rose 15% for the year.

Wholesale banking (40%), geared toward businesses, grew profits 11% last year. The wealth, brokerage, and retirement business (7%) managed profit growth of 4% in 2012.

Commercial-loan growth reflected strong activity in several pockets of the market, including business lending, commercial real estate, and corporate banking. Uncertainty regarding the fiscal cliff actually helped loan growth toward the end of the December quarter, though it may have pulled forward some March-quarter business.

The consumer-loan business benefited from favorable trends in auto, credit-card, and student lending. In the housing market, buying activity and prices still look low relative to historical standards, suggesting the rebound may still have plenty of life left. Wells Fargo started 2013 with $81 billion in unclosed mortgages in the pipeline, up 13% from a year ago. Refinancing accounted for more than 70% of the mortgage applications Wells Fargo received last year. While the Federal Reserve doesn't have much flexibility to lower interest rates further, the bank still sees hundreds of billions of dollars in refinancing opportunities just in its own portfolio.

Conclusion

Wells Fargo enjoys strong deposit inflows, with activity picking up in the December quarter. That influx, combined with low interest rates, put pressure on the bank's profit margins. But Wells Fargo hopes customer relationships, first established with a simple checking account, will eventually translate into demand for its other financial products. An annual report for Wells Fargo & Co. is available at 420 Montgomery St., San Francisco, CA 94104; (866) 249-3302; www.wellsfargo.com.

WELLS FARGO
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '12
0.91
vs.
0.73
7%
36.34
-
31.25
11 - 10
Sep '12
0.88
vs.
0.72
6%
36.60
-
32.62
12 - 11
Jun '12
0.82
vs.
0.70
2%
34.59
-
29.80
12 - 10
Mar '12
0.75
vs.
0.67
4%
34.59
-
27.94
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
91.25
3.36
0.88
36.60
-
27.94
11 - 8
2011
87.44
2.82
0.48
34.25
-
22.58
12 - 8
2010
93.25
2.21
0.20
34.25
-
23.02
15 - 10
2009
98.64
1.75
0.49
31.53
-
7.80
18 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
79
90
61
78
75
38

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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