The first large bank to report its quarterly earnings, Wells Fargo & Company (NYSE:WFC), beat expectations for the fourth quarter of 2012 with a 24% increase in net income (earnings per share were 91 cents as opposed to consensus of 89 cents). This was a slight acceleration from the third quarter, when net income came in 22% higher than in the same period in 2011. Revenue was up as well. However, the market’s initial reaction was actually negative as Wells Fargo reported that its net interest margin- essentially, the spread a bank earns on the funds it “borrows” from depositors and other sources- had declined on a q/q basis as well as from the fourth quarter of 2012. The net interest margin is a critical financial metric and signals that Wells Fargo may face problems further growing its earnings going forward.
The stock has been trading at a premium to the book value of its equity for some time, as Wells Fargo & Company has a reputation as being a more stable and reliable bank than many of its peers. In addition, the company has a history of showing that it can earn a strong return on its assets and so in terms of earnings it is actually looking cheap. The stock is trading at 10 times earnings, whether we use the actual numbers for 2012 or analyst consensus for 2013.
Wells Fargo & Company was one of the most popular stocks among hedge funds and other notable investors in the third quarter of 2012, according to our database of 13F filings (see the rest of the top ten). Warren Buffett has been a major investor in the company, and Berkshire Hathaway owned over 420 million shares of the bank at the end of September (check out more of Buffett’s favorite stocks). Billionaire Ken Fisher’s Fisher Asset Management and David Shaw’s D.E. Shaw each had over $400 million invested in Wells Fargo after large increases in their holdings during the third quarter (find more stock picks from Fisher and from D.E. Shaw).
Peers operating combined investment and retail banks- many of whom will report their own earnings in the next several days- include Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM); we can also compare Wells Fargo to U.S. Bancorp (NYSE:USB), a large Midwestern bank. The first three peers are all priced at discounts to the book value of their equity, ranging from a P/B ratio of 0.6 for Bank of America to 0.9 at JPMorgan Chase. In terms of earnings estimates for 2013, the field gets shifted a bit: Wells Fargo, at 10 times consensus, actually becomes a bit cheaper than Bank of America. Citi and JPMorgan Chase have forward P/Es of 9.
More on Wells Fargo and its peers:
In their most recent quarter, Citigroup and Bank of America’s numbers were down dramatically and with B of A seemingly not being a good value in terms of its earnings we would avoid that stock. JPMorgan Chase, meanwhile, reported considerably higher net income and it might be a good buy given its cheapness on both a book and earnings basis. US Bancorp carries trailing and forward P/Es of 12 and 11, respectively, placing it in value territory as well, and its most recent quarterly report (again, from Q3 2012) showed a 10% increase in revenue and a 16% increase in net income compared to the same period in 2011. We think it’s also worth considering.
The net interest margin news isn’t good, but overall we’re pleased with Wells Fargo’s report. The earnings multiples are low and the company continues to show good numbers on the bottom line. Some other large banks look like good values, and in the case of JPMorgan Chase that extends to a small discount to book value, but Wells Fargo should certainly be considered if an investor wants to buy a financial stock.
