Wells Fargo (NYSE:WFC) looks like a good bargain at current prices $25.13. Wells Fargo Stock is trading well below the bank’s tangible book value per share.
Moreover, I believe that the bank stock is worth at least 44% more based on simple measures of its value.
The stock has been in a major slump. In the past year, it has fallen over 48%. In fact, year-to-date it is down over 53%. New management came in this summer, taking over from the prior group that was associated with the fake account scandal.
In addition, Wells Fargo cut its dividend from 51 cents per quarter to 10 cents. Wells Fargo stock now yields just 1.59%, down from over 6.8% prior to this dividend cut.
But the stock price has not moved down when that was done in early August. In fact, Wells Fargo stock has risen over 4.5% in the last month.
Selling Below Tangible Book Value
As of June 30, the bank’s tangible book value per share (TBVPS) is $31.88 per share. This is 26.8% higher than Wells Fargo stock at $25.13 per share.
Here is what that means. TBVPS is what the company is worth after all debts are paid off and all its intangible assets are written off as if they are worth nothing.
So assuming no other losses occur which would lower TBVPS in the future, there is an implied gain of $6.75 per share if Wells Fargo stock were to rise to its TBVPS. That represents a theoretical gain of 26.8% for investors in Wells Fargo stock at today’s price.
Moreover, in the past, the stock has traded well above the TBVPS. For example, a year ago, Wells Fargo stock was at $48.93 per share. But its recent TBVPS as of June 30, 2019, was $34.03 per share. That was a 43.7% premium to its TBVPS.
Therefore if Wells Fargo stock were to rise to this level of a premium over the next year, the stock would hit $45.84, or 82.4% above today’s price.
Earnings Projections and Valuation Estimates
Analysts polled by Seeking Alpha estimate that Wells Fargo will earn $2.06 next year. The same is true with Yahoo! Finance. Their poll shows EPS estimates for 2021 at $2.08.
Moreover, Morningstar says that the company’s average price-to-earnings ratio over the past five years has been 12.8 times earnings. Therefore, if we apply this to analysts’ earnings estimate, i.e., 12.8 times $2.07 EPS, the target price will be $26.50 per share.
That target price is just 5.45% higher than today’s price. With the $45.84 TBVPS target with this $26.50 earnings target, the average of the two is $36.17 per share.
That is why Wells Fargo stock is worth 44% more than today’s price.
Barron’s has written several articles recently pointing out that analysts seem to agree with this price target. For example, the magazine refers to a Wolfe Research report valuing the stock at $34.00 per share. The analyst had met with the bank’s treasurer recently.
However, UBS Securities still has a price target of $24 per share, according to Barron’s. This is despite forecast expense reductions at the bank. That is 4.5% below today’s price.
Of 31 analysts now covering the stock, 12 now have it as a Buy or Strong Buy, according to Yahoo! Finance, as of Sept. A month ago only 4 analysts out of the same group had it as a Buy.
What To Do With Wells Fargo Stock
I have shown that Wells Fargo stock is selling well below its present and historical TBVPS metrics. In case you are wondering, Wells Fargo’s peers on trading at premiums to their tangible book value.
For example, JPMorgan Chase (NYSE:JPM), at $98.35 per share, is 61% above its TBVPS of $60.98 per share. In addition, even Bank of America (NYSE:BAC), at $25.21, is 26% above its $20.00 TBVPS.
This shows just how deeply undervalued Wells Fargo stock is at the present time. Let’s be conservative about this. Let’s say it takes 2 years for the stock to recover 44% to my $36.17 price target.
That implies a 20% compound return each year. If you add in the 1.59% annual dividend yield, the total return will be 21.6% each year. That is a pretty satisfactory ROI for most conservative investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
