Earnings season is always a critical moment for publicly traded companies. However, the third quarter is especially crucial for Wells Fargo (NYSE:WFC). Yes, Wells Fargo stock could use a lift following an ugly performance this year that lagged its rivals. Of course, that discussion has fallen to the side in light of the broader markets’ meltdown.
The Dow Jones suffered a shocking blow to the solar plexus on Wednesday, shedding nearly 832 points. While all sectors felt the heat, technology, in particular, bore the brunt of the damage. Popular names like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) tanked, sending jitters of a potentially prolonged correction.
This dynamic is worrisome for WFC stock since it indicates a hit to consumer sentiment. Although the Trump administration always makes time to highlight rising GDP and multi-year low unemployment, the reality is that the economic recovery is on a nuanced path.
As I noted for my August write-up for Bank of America (NYSE:BAC), the labor force participation rate is a scant 63%. Bringing in the broader context, this key metric hasn’t improved at all since the 2008 financial collapse. Therefore, any damage to the stability of either our economy or our markets should be taken seriously.
So far, the signs don’t point in a positive direction for Wells Fargo stock. A vitriolic landscape has fractured political discourse. Our ongoing trade conflict with China is unlikely to thaw soon.
Ironically, the rising benchmark interest rates, which are supposed to be net positive for WFC stock, represents a hindrance to everyone else.
If those headwinds weren’t enough of a challenge, WFC faces its own demons. High-profile acts of malfeasance have cratered Wells Fargo stock relative to its big-banking competition. Can the once-respected organization turn things around in Q3?
WFC Offers Up Mixed Results for Q3
If investors were looking for a knock-out punch from the big banks, they didn’t get it. With the notable exception of JPMorgan Chase (NYSE:JPM), we saw several mixed results. WFC was no different.
Heading into Q3, consensus estimates pegged earnings per share at $1.17. Individual forecasts ranged from $1.12 to $1.21. According to a CNBC broadcast, EPS on an adjusted basis came in at $1.16, or a negative surprise of 0.9%.
On a longer-term context, though, Wells Fargo demonstrates earnings momentum. In the prior-year quarter, the bank delivered an EPS of 84 cents. In Q3 2016, they reported $1.03 per share.
Adding to the positive aspect, the company produced a revenue beat, albeit a slight one. Against a consensus target of $21.9 billion, WFC rang up $21.94 billion. The year-ago level saw top-line sales of $21.7 billion.
Perhaps because some positives existed in the banking sector’s earnings results, Wells Fargo jumped up over 2% during pre-market trading. But is this enthusiasm justified?
My immediate gut reaction tells me no. Although I appreciate the momentum in both profitability and sales, we’re talking about a narrow timeframe. Net income has steadily declined in the past four years, and that trend might not change dramatically by 2018 end. Revenue is on pace to fall short of both 2016 and 2017 results.
Moreover, I didn’t like some of the details in the report, particularly non-interest income. That figure came in at $9.4 billion, which is down $31 million from Q3 2017. I find this problematic as non-interest income represents sales from actual business: lending, advising, consulting and so forth.
The results further underline my concern that the big banks – and Wells Fargo stock specifically — are producing “paper beats,” but are lacking substance.
We Need to See Much More From Wells Fargo stock
Generally, I don’t think it’s a great idea to overreact to any single earnings report. I think that’s especially the case for a member of the “Big Four.” Having said that, we really haven’t seen enough from WFC stock.
In all fairness, management can only do so much. The company and the big-banking sector have a host of problems to overcome. If I had to pick one, I’m going to go with the resultant consequences of rising rates.
The mainstream media focuses significant attention on the fractured political state. While that’s an ideological dilemma, a bigger issue is the rapidly-widening wealth gap. Job growth has taken off in major metropolitan areas. But in turn, housing prices in those regions have also skyrocketed.
Worse yet, the cost of attaining real estate has grossly outpaced wages. In January 2010, all private-sector employees averaged $22.42 per hour in income. Last month, the U.S. Bureau of Labor Statistics reported average wages of $27.24 per hour, or 21.5% growth. But according to the Census Bureau, the median sales price for new homes jumped nearly 46% between 2010 and 2017.
In order for Wells Fargo stock to move higher, management must answer two questions: how will families averaging less than $57,000 in annual salaries buy homes in excess of $320,000, and why would they with interest rates becoming unattainably high?
Another irony impacting WFC stock is that the mortgage industry learned its lesson from the last housing crisis. Banks no longer lend to subprime borrowers. However, the hard data indicates that they didn’t cause the crisis. Either way, WFC needs less-than perfectly prime borrowers to juice up its lending revenue.
As we know, that’s just not going to happen.
Bottom Line for WFC stock
So far, investors apparently see more good in WFC stock than bad. It’s probably tempting to jump in but I’d avoid feeding that urge.
Yes, Wells Fargo stock will probably enjoy a solid Friday session. The Dow Jones and the major indices will also join in on the fun. But JPMorgan’s Jamie Dimon recently sounded off on his concerns about inflation and geopolitical tensions.
In other words, whatever positive market action that results for WFC is a transient respite.
The banking sector, especially the big banks, have multiple domestic and international headwinds to address. Wells Fargo has its own internal, unforced errors to address as well. In such a compromised environment, the answer is clear: sideline Wells Fargo stock until you see better signals.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.