Wells Fargo & Co (NYSE:WFC) on Friday has its first earnings report and conference call since the fake account scandal broke, and you can be sure it will be an interesting day for WFC stock.
Shares in Wells Fargo have been reeling ever since it came out that thousands of employees secretly opened millions of account for customers without their knowledge or consent. At its nadir, WFC was off 10% from its pre-scandal high. That made $25 billion in market value go poof on revenue loss of $2.6 billion, plus $185 million in fines.
True, some customers are closing their accounts in protest, and it will take years for WFC to get past this reputation-killer. It’s tough to put a price on headline or brand risk. But $25 billion? I think we’re good here.
It’s also interesting that although Wells Fargo stock is down 16% for the year-to-date, it may have found a bottom in the first week of October.
Traders can find some hope in the fact that WFC recently managed to overcome its ultra-short-term 20-day moving average.
Click to Enlarge In other words, it looks like the market feels as if it has adequately discounted Wells Fargo stock for the great mess that is the phony accounts scandal.
But we’ll get a much better sense of that after the WFC earnings report.
WFC Stock and the Earnings Hurdle
WFC is forecast to post earnings of $1.01 a share for the most recent quarter, down from $1.05 a share in the same period a year ago, according to a survey by Thomson Reuters. Revenue is expected to tick up 1.6% to $22.22 billion.
As much as the company’s misconduct and sales culture will be in focus, investors still need to dig down into more prosaic matters — that is, the business of banking. WFC is the nation’s largest mortgage lender. The state of this business and the broader housing market are hardly immaterial to results.
That’s also true of net interest margin — the difference between what a bank pays for deposits and charges for loans. Interest rates remain in the basement and are continuing to pressure the already-thin measure of profitability.
Analysts will also key on any management commentary about customers fleeing the bank. But unless something truly shocking comes out of this quarterly report, WFC stock sure looks like a buy on valuation. The bank’s price-to-book ratio — which has looked a bit rich for years now — has come down to 1.28. Indeed, a number of Wall Street analysts have upgraded the name to buy in recent weeks.
Furthermore — and this is important — short interest in WFC stock remains negligible. That says something very optimistic about sentiment on this name.
Again, we’ll get a better sense of where all this going after the Wells Fargo earnings report. Although it’s never wise to be complacent, at this point WFC is a hold at worst — and probably a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
