Wells Fargo & Company (WFC) is scheduled to
report its first quarter 2012 results before the market opens
today. The Zacks Consensus Estimate for the quarter is 73 cents per
share, representing an estimated year-over-year growth of about
9.5%.
We expect Wells Fargo to report a decent number this quarter but
not a stellar one. We think that with solid fundamentals and
strategic acquisitions, the company would benefit from an economic
improvement, though a tepid one, and a somewhat upbeat borrower
sentiment. However, with moderate growth in loans and a low
interest rate environment, we think any extraordinary earnings
figure would be elusive this quarter.
Considering the current economic environment, the recent trends
in the credit metrics and the company’s efforts to improve its
credit quality, we expect additional reserve releases by Wells
Fargo. However, the pace of improvement in credit quality is
projected to be slow as portfolio quality approaches a stable, more
normal level.
Notably, Wells Fargo passed the stress test of the Federal
Reserve with flying colors in March. The company also enhanced its
shareholder wealth by almost doubling its dividend.
Previous Quarter Performance
Wells Fargo’s fourth quarter 2011 earnings of 73 cents per share
were a penny ahead of the Zacks Consensus Estimate. Results
improved from earnings of 72 cents per share in the prior quarter
and 61 cents per share in the year-ago quarter.
Quarterly results were driven by a higher top line and improved
credit quality, along with strong capital ratios were positives
during the reported quarter. However, increased operating expenses
were on the downside.
Fourth quarter net income applicable to common stock came in at
$4.1 billion, modestly in line with the prior quarter and up from
$3.4 billion in the prior-year quarter.
For full year 2011, Wells Fargo’s net income applicable to
common stock was $15.9 billion or $2.82 per share, up 28% year over
year. Earnings per share for the full year also surpassed the Zacks
Consensus Estimate by a penny.
The quarter’s revenue of Wells Fargo came in at $20.6 billion,
which was above the Zacks Consensus Estimate of $20.1 billion and
up 5.1% sequentially. For the full year, revenue was $81.0 billion,
down 4.9% from $85.2 billion in 2010. However, this compares
favorably with the Zacks Consensus Estimate of $80.5 billion.
Wells Fargo reported a reserve release of $600 million (pre
tax), attributable to improved portfolio performance. The company
also expects future reductions in the allowance should the economy
improve significantly.
Earnings Estimate Revisions – Overview
Ahead of the earnings release, we notice a bullish trend in the
estimate revisions. The Zacks Consensus Estimates for the first
quarter and full year 2012 have been revised upward. However, the
magnitude of such revisions suggests that despite being bullish,
the trend is not a very robust one.
We will now discuss the details of earnings estimate revisions
to substantiate why short-term investors should be somewhat buoyant
on this stock.
Agreement of Estimate Revisions
The estimate revision trend confirms that the majority of
analysts are apprehending a somewhat stable first quarter for Wells
Fargo. Of the 23 analysts covering the stock, 2 have increased
their estimates for the first quarter, while none has moved in the
opposite direction over the last 7 days.
Also, for full-year 2012, there were 2 upward estimate revisions
and no downward movement. For full-year 2013, 2 upward revisions
were witnessed again while none moved south over the last 7
days.
Magnitude of Estimate Revisions
We notice a somewhat positive trend in the earnings estimate
revisions but the magnitude of such revisions was small in the last
7 days. The Zacks Consensus Estimate for the first quarter remained
flat at earnings per share of 73 cents. For full-year 2012, the
estimate increased 1 cent to $3.24 per share. In addition to this,
the Zacks Consensus Estimate for full-year 2013 went up 1 cent to
$3.64 per share over the last 7 days.
Earnings Surprise
Wells Fargo’s performance has been somewhat stable over the
trailing four quarters with respect to earnings surprises. The
average earnings surprise was a positive 1.4%. This implies that
the company has beaten the Zacks Consensus Estimate by the same
magnitude over the last four quarters.
Our Viewpoint
The estimate revision trend indicates that some fresh investment
in this stock will be a good decision, at least in the short run,
given the slight potential for upside pressure on the stock.
Moreover, we believe that over the long term, investors should
not be disappointed with their investments in Wells Fargo given its
diverse geographic and business mix which enables it to sustain
consistent earnings growth. Going forward, we believe that
strategic acquisitions will help expand Wells Fargo’s business and
improve its profitability.
Though the Wells Fargo stock is not undervalued at this moment,
we believe that long-term investors, who can absorb the risks
related to economy and regulations, can expect a decent growth in
Wells Fargo’s earnings in future. Solid capital levels, expense
management as well as improved credit quality will also support its
profit figures.
Moreover, following the approval of the capital plan by the
Federal Reserve, Wells Fargo has hiked its dividend by 10 cents to
22 cents per share. The capital plan also includes an increase in
share repurchase activity in 2012 compared with the prior year. It
also incorporates selective redemptions of trust preferred
securities that no longer count as Tier 1 Capital under the
Dodd-Frank Act. Such efforts have a positive impact on the stock
price.
Yet, we believe the top-line headwinds would persist, given the
protracted economic recovery. Plus, a low interest rate environment
would keep its margin under pressure. Wells Fargo’s unrelenting
legacy mortgage issues also remain a concern. With the thrust of
new banking regulations, there will be pressure on fees and loan
growth could remain feeble.
Conclusion
Going by estimate revision trends and the magnitude of revision,
there is admittedly an upward pressure, though slight, on the
shares over the near term. Wells Fargo shares maintain a Zacks #2
Rank, which translates into a short-term Buy rating.
However, after reviewing the company’s business model and
fundamentals, the recent acquisitions and the capital deployment
efforts, we have a long-term Neutral recommendation on the
stock.
Concurrent with Wells Fargo, JPMorgan Chase &
Company (JPM) also kicks off the earnings season for the
banking sector by reporting on April 13. Next in line is
Citigroup Inc. (C) which will report on April
16, while Goldman Sachs Group Inc. (GS) will
report on April 17 and Bank of America Corporation
(BAC) on April 19.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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