Wells Fargo & Co (NYSE:WFC) beat analysts’ quarterly estimates even as profit declined year-over-year, and that should provide some support to WFC shares as the bank works to put its phony accounts scandal behind it.
With all that’s been happening at Wells Fargo recently it’s been tough to focus on what’s a fair price for Wells Fargo stock. Shares are down about 10% after it came to light that thousands of employees opened millions of accounts for customers without their knowledge or consent.
The bank agreed to a slap-on-the-wrist settlement of $185 million and CEO John Stumpf was eventually forced into retirement. Even more damage comes from the hit to WFC’s once squeaky clean reputation and the outlook for account growth in the retail business.
Those unknowns are harder for the market to discount right now, but there’s reason to believe they are already priced in and then some. After a 10% drop, Wells Fargo has seen $25 billion in market value disappear on revenue loss of $2.6 billion and $185 million in fines. Surely a lot — if not most — of the downside has been priced it by now.
WFC Stock Beats the Street
The argument that this selloff has been at least a bit overdone is supported by the bank’s most recent quarterly results. WFC earnings fell almost 4% to $5.24 billion, or $1.03 a share, from $5.44 billion, or $1.05 a share, in the same period last year.
But when it comes to earnings, expectations are everything, and on that score WFC was a winner. Analysts polled by Thomson Reuters were looking for WFC earnings of $1.01 a share. That’s a pretty wide earnings beat.
Furthermore, revenue came to $22.3 billion against the Street’s forecast for $22.2 billion.
Total average loans rose 7% in the quarter to $957.5 billion, while mortgage originations increased 27% year-over-year. The nation’s largest mortgage lender also saw a 5% gain in mortgage banking revenue.
On the downside, WFC set aside $805 million to cover potential losses on loans, which represents an increase of nearly 15% over the same period a year ago. Additionally, WFC’s cost-cutting efforts are now being stymied by expenses tied to cleaning up the fake-accounts fiasco.
We’re still in the early innings of the aftermath of the scandal, but Wells Fargo stock looks intriguing at current levels. For one thing, the valuation has become more compelling. The bank’s price-to-book ratio — which has looked a bit rich for years now — has come down to 1.26. Indeed, a number of Wall Street analysts have upgraded the name to buy in recent weeks.
It’s also instructive that short interest in WFC stock remains negligible. That says something very optimistic about sentiment on this name.
WFC appears to have passed the test of its first post-debacle earnings report. Although operational and reputational headwinds may be stiff for some time, the bank is doing better than expected.
For investors who can wait it out, WFC will eventually bounce back from this, and that makes shares a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
