Case Study: What Credible analysts are saying on Wells Fargo (WFC) stock
Key Points
Performance
Wells Fargo (WFC) rose by 3.3% this week, pushing their year-to-date performance up to 5.81%. This compares favorably to the S&P 500, which is up by approximately 4.6% during 2023 thus far.
Event & Impact
Wells Fargo announced Q4 results this week, beating Wall Street’s expectations on the bottom-line, posting GAAP EPS of $0.67/share, which was $0.06/share above consensus estimates. However, the company’s Q4 revenue came in at $19.66 billion, which was $380 million below expectations.
Noteworthy News:
Wells Fargo continues to deal with the fallout from its scandalous past, with 5-star Nobias author, John Foley, noting that “the total notional cost of Wells Fargo’s misconduct” has not exceeded $100 billion.
Nobias Insights
55% of recent articles published by credible authors focused on WFC shares offer a “bullish” bias. Furthermore, all three credible Wall Street analysts who recently covered Wells Fargo believe the share price is likely to rise. The average price target applied to WFC by credible analysts is $51.33, implying upside potential of approximately 16.1% relative to the stock’s current share price of $44.22.
Bullish Take John Reosti, a Nobias 4-star rated author, said: “The firm pulled in a record $13.4 billion in net interest income in the quarter, surpassing analyst expectations. The 45% rise from a year earlier shows the dramatic impact of the Federal Reserve's interest rate hikes on Wells Fargo's bottom line.”
Bearish Take Giles Gwinnett, a Nobias 4-star rated author, said, “In the three months to end-December, the US's fourth largest lender posted a profit of US$0.67 per share, compared to US$1.38 per share in the fourth quarter of 2021.”
WFC Jan 2023
With big-banks beginning to post earnings this week, sentiment wise, there’s a tug-of-war going on between rising interest rates (which are generally bullish for bank earnings as net interest income rises) and the ongoing threat of an economic slowdown and recession on the horizon.
Harrison Miller, a Nobias 4-star rated author, recently touched upon analyst sentiment surrounding the banks in an article published at Investors.com, writing, “Barclays analyst Jason Goldberg thinks bank stocks are likely to show resilience, despite the recession concerns as loan growth slows and loan losses increase.”
Miller also wrote, “Oppenheimer analyst Chris Kotowski believes banks will remain "steadier than most think" in the fourth quarter and 2023, even as his models predict loan losses will nearly double as credit trends normalize.”
Wells Fargo (WFC) was one of the banks that reported earnings this week, and despite an initial sell-off following its results, WFC shares rallied into the end of the week, closing the week up 3.3%, pushing their year-to-date returns to up 5.8%. Wells Fargo is a bit of a battleground stock itself, as investors weigh its scandalous history and its poor relative performance over the past 5 years or so against its former glory as a potential contrarian bet.
With specific regard to Wells Fargo, Miller highlighted recent headwinds that the stock has overcome throughout 2023 thus far. He said, “In late December, the Consumer Financial Protection Bureau fined Wells Fargo $3.7 billion for engaging in numerous banking violations that harmed customers dating back to 2011.”
Also, Miller highlighted surprising news that WFC was planning to significantly alter its mortgage business. He noted, “Wells Fargo is the largest mortgage servicer in the U.S. with nearly $1 trillion in loans, or 7.3% of the market, as of Q3, CNBC reported.”
However, he said, “On Tuesday, Wells Fargo announced plans to dramatically shrink its mortgage business.” Harrison continued, “It will now only offer home loans to existing bank and wealth management customers, as well as borrowers in minority communities. The bank is also closing its correspondence business, which sells mortgages through third parties, and "significantly" reducing its mortgage servicing portfolio through asset sales.”
Reducing its exposure to mortgage lending, the company’s former cash cow business, caused some to question the bank’s growth potential. However, WFC’s 5.8% year-to-date gains are better than the broader market (the S&P 500 is up by 4.6% thus far throughout 2023), and it appears that many investors are looking past regulatory headwinds and towards the company’s strong net interest income results supported by the Federal Reserve's hawkish policies.
Bearish Nobias Credible Analysts Opinions:
Giles Gwinnett, a Nobias 4-star rated author, wrote an article focused on Wells Fargo’s earnings this week, stating, “The weaker numbers come as revenue fails to meet the bank's expectations and it has had to deal with 'one-off' costs related to litigation and regulatory and customer remediation as the company continues to deal with a six year old scandal over sales practices.”
Looking at WFC’s Q4 results, Gwinnett said, “In the three months to end-December, the US's fourth largest lender posted a profit of US$0.67 per share, compared to US$1.38 per share in the fourth quarter of 2021.” In other words, WFC’s bottom-line was slashed by approximately 50%. Gwinnett also said, “The bank's total revenue dropped in the quarter to US$19.7 billion versus US$20.9 billion in Q4, 2021.”
Bullish Nobias Credible Analysts Opinions:
John Reosti, a Nobias 4-star rated author, also covered Wells Fargo’s recent earnings report this week. He published an article which stated, “Wells Fargo posted higher-than-expected fourth-quarter expenses, even after the firm warned of a hefty loss tied to a regulatory sanction last month.”
Reosti continued, “The firm spent $16.2 billion in the last three months of the year [on regulatory sanctions], according to a statement Friday, exceeding analyst estimates. That included $3.3 billion in operating losses after Wells Fargo said last month it would book costs for a settlement with the Consumer Financial Protection Bureau and other legal issues.”
However, he also pointed out that without the regulatory headwinds, WFC’s quarter would have been quite impressive from an income perspective. Reosti said, “The firm pulled in a record $13.4 billion in net interest income in the quarter, surpassing analyst expectations. The 45% rise from a year earlier shows the dramatic impact of the Federal Reserve's interest rate hikes on Wells Fargo's bottom line.”
John Foley, a Nobias 5-star rated author, published an article at Reuters this week which put a spotlight on the long-term damage that Wells Fargo’s scandals have caused the bank, and more importantly, its shareholders. He wrote, “Serial mischief has cost Wells Fargo investors in three ways.”
“First,” Foley said, “there are penalties that show up in what the bank calls “operating losses.” It will have booked $25 billion of them since the beginning of 2017, the first full year after widespread fraudulent habits were uncovered in its consumer bank. Of that sum, it has paid $11.5 billion in fines, according to the Good Jobs First Violation Tracker. That is money diverted from stock buybacks and dividends, or which deprives the bank of earnings to fuel future lending.”
“Second,” he continued, “there are the expenses Wells Fargo has incurred from its internal deep clean. Those range from “professional services” to extra hires in its compliance and administrative teams. Before the fake-accounts scandal, Wells Fargo used to spend around $50 billion annually on expenses, excluding operating losses. Since then, it has laid out around $16 billion above that baseline. Together with the operating losses, it suggests over $40 billion of pre-tax earnings have been thrown on the bonfire.”
Lastly, he said, “Shareholders have suffered the biggest cost, however, in a less straightforward way: the balance sheet restrictions.”
Foley continued, “America’s top six banks as a group, over the past five years, have expanded their balance sheets by one-third. Had Wells Fargo been permitted to keep pace, it might have amassed an additional $650 billion in assets.” With that in mind, he noted, “Wells Fargo consistently generates earnings of about 1% from its assets. At that rate, it suggests $6.5 billion of forgone profit.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
And therefore, he said, “Since investors have tended to value Wells Fargo at 11 times its forecast year-ahead profit over the last decade, according to Refinitiv, it equates to some $70 billion of market capitalization that the Fed’s financial handcuffs have put out of reach, and takes the total notional cost of Wells Fargo’s misconduct to more than $100 billion.”
Overall bias of Nobias Credible Analysts and Bloggers:
55% of recent articles published by credible authors on Wells Fargo have expressed a “bullish” bias. Furthermore,, the credible analysts that the Nobias algorithm tracks are more bullish on WFC.
Their average price target for WFC shares is $51.33, which implies that the recent rally is likely to continue. Wells Fargo shares currently trade for $44.22, meaning that the credible analysts that Nobias tracks see upside potential of approximately 16.1%.
Disclosure: Nicholas Ward has no WFC position. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.