Kass: Buy the Wells Fargo Deal

This blog post originally appeared on RealMoney Silver on Nov. 6 at 11:31 a.m. EST.

I plan to buy into the Wells Fargo (WFC) deal, which is being priced tonight. I expect the pricing to be under $28 per share, and I also expect the deal to be sized up to north of $15 billion.

Here is my quick, dirty and simple rationale:

1. The necessity of public policy is to reshape the financial industry into a commercial banking model. The largest banks -- JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo -- are all "protected" and are beneficiaries of that policy. They will, in the fullness of time, mop up the benefits of the financial sector's transformation.

2. Taking an economic view that the U.S. economy will return to a degree of normalcy within 12 months, Wells Fargo is very well positioned as the largest bank in the fastest-growing regions of the country. It is dominant on the East Coast and close to Bank of America on the West Coast, with more branches, ATMs, etc., than any other bank extant. Stated simply, Wells Fargo now has an envious reach.

3. Excluding the roll-off of the Wachovia (WB) business (read: losses), estimates support a higher price for Wells Fargo's shares. JPMorgan's bank analyst is using EPS estimates of $2.60 for 2009, $3.00 for 2010 and $4.30 for 2011. The numbers move much higher if one treats the Wachovia loss as extraordinary.

4. If Wells Fargo can execute the same sort of cross-selling model successes with its Wachovia acquisition that the company has historically achieved -- the average customer has 5.7 products with bank -- the outlier earnings benefits through the inherent operating leverage will be substantial.

5. I would not be surprised if Warren Buffett participates and adds to his already substantial position.

6. Finally, with a 4.7% dividend yield, an investor is paid to wait for a more favorable economic and operating environment.

The risk is the credit cycle and the potential losses from Wells Fargo's large home equity portfolio. The positive here is that we must assume that the FDIC and regulatory bodies were comfortable with the risks, or else they would not have sanctioned the Wachovia deal.

Wells Fargo is not a short-term long rental; it is a long-term investment.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.

>To order reprints of this article, click here: Reprints