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Buy Wells Fargo: Jefferies

NEW YORK (TheStreet) -- Jefferies Analyst Ken Usdin on Monday initiated his firm's coverage of Wells Fargo with a buy rating, saying "the bank's bias is to return capital to shareholders and provide for growth in the near-term."

Wells Fargo's shares closed at $33.05 Friday, trading for just above tangible book value, according to Thomson Reuters Bank Insight, and for nine times the consensus 2013 earnings estimate of $3.66 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.29.

The shares trade significantly higher by both measures than those of the other three members of the "big four" club, reflecting Wells Fargo's stronger and more consistent earnings performance. The company's operating returns on average assets (ROA) have ranged between 1.21% and 1.30% over the past five quarters, according to Thomson Reuters Bank Insight.

Usdin said that "when thought of in relation to the universal banks, Wells has a simpler business model with a smaller balance sheet and potentially stronger growth potential." Here's how the other three "big four" members compare:

  • Shares of JPMorgan Chase (JPM) closed at $33.90, returning 4% year-to-date, following a 20% decline during 2011. The shares trade just below their reported March 31 tangible book value of $34.91, and for six times the consensus 2013 EPS estimate of $5.30. The consensus 2012 EPS estimate is $4.30. The company will kick-off bank earnings season before the market opens on Friday, with analysts polled by Thomson Reuters expecting a 79-cent profit, declining from EPS of $1.31 the previous quarter and $1.27 a year earlier. Investors of course continue to wonder just how much in second quarter trading losses the company will report, after CEO James Dimon disclosed a hedge trading loss by its Chief investment Office (CIO) estimated at "slightly more than $2 billion," on May 10. JPMorgan's operating ROA has ranged between 0.68% and 1.06% over the past five quarters.
  • Shares of Bank of America (BAC) closed at $7.66 Friday, returning 38% year-to-date, after dropping 58% during 2011. The shares trade for 0.6 times their reported March 31 tangible book value of $12.87, and for eight times the consensus 2013 EPS estimate of 97 cents. The consensus 2012 EPS estimate is 56 cents. Bank of America will report its second-quarter results on July 18, with analysts expecting earnings of 15cents a share, compared to a three-cent profit during the first quarter, and a net loss of 90 cents a share in the second quarter of 2011, when the company entered into an $8.5 billion mortgage putback settlement with private investors. Bank of America's operating ROA over the past five quarters has ranged from a negative 1.51% to a positive return of 1.08%.
  • Shares of Citigroup (C) closed at $26.36 Friday, for a flat year-to-date return, following last year's 44% decline. The shares trade for just over half their reported March 31 tangible book value of $50.90, and for less than six times the consensus 2013 earnings estimate of $4.56. The consensus 2012 EPS estimate is $3.95. Citi will report its second-quarter results on July 20, with analysts expecting earnings of 92 cents a share. The consensus EPS estimate for all of 2012 is $4.01. The company's operating ROA has ranged between 0.20% and 0.67% over the past five quarters.

Wells Fargo will report its second-quarter results on July 13, with the consensus estimate being an 81-cent profit, increasing from 75 cents the previous quarter and 70 cents a year earlier. Usdin estimates the company will report second-quarter operating earnings of 81 cents a share, but his EPS estimate of $3.25 for all of 2012 is slightly behind the consensus estimate of $3.29.

Usdin said his $39 price target for Wells Fargo "implies an 11x multiple on our 2013 EPS estimate of $3.55," which is "modestly below the bank's historical forward multiple of 13.8x (from 2001-present)," with the lower multiple accounting "for lower post-cycle growth, lower leverage as a result of Basel III capital rules, and higher-than-historical regulatory risk."

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