This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

QE3 Downgrades Wells Fargo

Mutascio on Monday said that a 17-point third-quarter drop in Wells Fargo's net interest margin "would be nearly double the 9 basis points of margin compression we were anticipating this quarter." This will be partially offset by "stronger than originally anticipated mortgage banking income will partially offset the negative impact of the substantial margin compression," according to the analyst, but "as the refinance boom wanes, we believe the margin compression will have a greater impact on EPS - especially if the Fed stays true to its pledge of near 0% short-term interest rates for the next three years."

Mutascio lowered his 2012 earnings estimate for Wells Fargo by only three cents, to $3.30 a share, but lowered his 2013 EPS estimate by 13 cents to $3.52, and lowered his price target for the shares by two dollars, to $38.00.

Wells Fargo's shares closed at $36.13 Friday, returning 34% year-to-date, following a 10% decline during 2011. The shares trade for 2.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 EPS estimate of $3.66, among analysts polled by Thomson Reuters.

The shares trade at a much higher price-to-book ratio than the other three members of the "big four" U.S. banking club, however, Wells Fargo's steady and solid earnings support the higher valuation. The company's operating returns on average assets (ROA) have ranged between 1.26% and 1.40% over the past five quarters, according to Thomson Reuters Bank Insight, while its operating returns on equity (ROE) have ranged between 11.51% and 12.37%.
  • Shares of JPMorgan Chase (JPM - Get Report) closed at $41.57 Friday, returning 28% year-to-date, following a 20% decline last year. The shares trade for 1.3 times tangible book value, and for eight times the consensus 2013 EPS estimate of $5.20. Over the past five quarters, the company's ROA has ranged from 0.68% to 0.99%, while its ROE has ranged from 8.25% to 11.94%.
  • Shares of Bank of America (BAC - Get Report) closed at $9.55 Friday, returning 72% year-to-date, following a 58% decline during 2011. The shares trade for 0.8 times tangible book, and for 1.5 times the consensus 2013 EPS estimate of 91 cents. Over the past five quarters, Bank of America's ROA has ranged from a negative 1.51% - during the second quarter of 2011, when the company lost $8.8 billion, or 90 cents a share, mainly from a mortgage putback settlement with private investors -- to 1.08%. BAC's ROE has ranged from a negative 15.02% to 11.21%, over the same period.
  • Shares of Citigroup (C - Get Report) closed at $34.79 Friday, returning 32% year-to-date, following a 44% decline during 2011. The shares trade for 0.7 times tangible book value, and for eight times the consensus 2013 EPS estimate of $4.53. Citigroup's ROA has ranged from 0.20% to 0.77% over the past five quarters, while the company's ROE has ranged from 2.18% to 8.41%.

Despite the downgrade, Mutascio said that "for those investors trying to hedge themselves against the never-ending "risk-on"/"risk-off" rotation trades," we would still view WFC (as well as US Bancorp - USB - Hold) as the high quality names within a bar-bell investing approach (holding some high quality banks along with some banks with more risk), given their above-peer profitability and strong management teams."

A different view on mortgage volume.

FBR analyst Paul Miller on Monday reiterated his "Outperform" rating on Wells Fargo, with a price target of $39, saying after meeting with the company's mortgage banking management that "we continue to favor WFC due to its significant exposure to the mortgage market, which should provide a meaningful tailwind to earnings for the foreseeable future."
2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.35 -2.80%
C $45.58 -2.40%
JPM $62.55 -1.90%
WFC $50.01 -1.10%
AAPL $95.18 1.60%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs