WFC is a leading U.S. bank with roughly $1.9 trillion in assets on its balance sheet. It operates four business segments: corporate and investment banking, wealth and investment management, consumer banking, and commercial banking.
I am neutral on Wells Fargo & Company (WFC) as its undervalued stock price, based on historical valuation multiples and analyst consensus price targets, is offset by the numerous headwinds and challenges that the business is trying to overcome at the moment.
In this article, I will lay out three reasons why I am neutral on WFC stock at current prices.
Weak Q1 Results
WFC recently reported disappointing Q1 results which showed revenue and diluted earnings per share declining year-over-year. While the revenue decline was not too severe, diluted earnings per share fell by 13.7% year-over-year. As a result, return on equity fell from 10.3% to 8.4%.
While these were some negatives, WFC did report a higher average loan and average deposit total during the quarter and the company repurchased 110.1 million shares for $6 billion, which represents 3.6% of the current market cap. Such strong allocation towards buybacks reflects management’s conviction that the stock is materially undervalued.
Still, the quarterly earnings results were quite poor, especially when considering that the results would have been even worse had it not been for declines in the allowance for loan losses. Earnings from fees were a big driver of the disappointing performance, especially in the mortgage, wealth management, and investment banking segments.
Fragile Competitive Positioning
While WFC’s massive scale and well-recognized brand does give it a moat of sorts, the company’s competitive standing has declined in recent years due to scandals that have gone public, and the company’s performance has been choppy, as of late.
In particular, the company is trying to improve efficiencies that currently lag its peers. In Q1, WFC had an efficiency ratio of 79% while JPMorgan had an efficiency ratio of 62%, so management is planning to slash expenses further, particularly in its mortgage business segment. It is also striving to stop the bleeding in several of its business segments as it simultaneously tries to overcome the negative stigma associated with its name from its scandals.
Attractive Stock Price
While the fundamentals of the business paint a somewhat bearish picture, the attractive valuation looks like it could offset that. For example, the price to earnings ratio is currently 9.38x, which stands at a steep discount to the company’s five-year average price to earnings ratio of 12.76 times.
Furthermore, Wall Street analysts appear to be quite bullish on the stock. According to Wall Street analysts, WFC earns a Strong Buy analyst consensus based on eight Buy ratings, four Hold Ratings and zero Sell ratings in the past three months. Additionally, the average analyst WFC price target of $58.67 puts the upside potential at 39.33%.
On top of that, earnings per share are expected to continue growing at a mid-single digit annualized pace over the next half decade and the dividend is expected to grow at a very impressive 15.7% annualized pace over that same time frame. On the other hand, book value per share is expected to decline slightly at a 0.4% annualized pace over the next five years. Profitability is expected to improve with return on equity expected to expand from 9.63% in 2022 to 10.60% in 2026 as interest rates rise and WFC improves its efficiency ratios.
Summary and Conclusions
WFC stock definitely appears to be a value name here, with the valuation multiple indicating that it is trading at a steep discount to its historical levels and dividend growth, and aggressive share buybacks likely to continue for the foreseeable future. The fact that Wall Street analysts are quite bullish on the stock also bodes well for its future outlook.
At the same time, the stock is far from risk-free. The business is currently suffering from disappointing performances in several of its segments and saw earnings decline meaningfully year-over-year in its most recent quarter. Furthermore, the company has a long way to go in improving its operating efficiencies, regaining trust with customers, and repairing its public image after its recent scandals.
Investors looking for value and dividend growth backed by a proven business model might find WFC stock attractive. However, given the significant challenges that the business is striving to overcome at the moment in order to get back on track, there remains a considerable amount of risk to the investment thesis for WFC stock. As a result, more conservative investors may want to consider waiting for some of the storm clouds to clear for both the economy and the company itself before adding shares.
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