Wells Fargo: Financial Winner

NAR chief economist Lawrence Yun said "we've transitioned to a seller's market in much of the country," and that "buyer traffic is 40% above a year ago."

The Federal Reserve Bank of Philadelphia said manufacturers responding to its local Business Outlook Survey for February "reported declines in activity this month," and that "indicators for general activity and new orders have now registered negative readings for the past two months." The survey's diffusion index of current activity came in at minus 12.5 for February, declining from minus 5.8 in January. Economists had expected 4 for February.

Wells Fargo

Shares of Wells Fargo have returned 4% this year, following a 27% gain in 2012. The shares trade for 1.6 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.1 times the consensus 2014 earnings estimate of $3.89. The consensus 2013 EPS estimate is $3.65.

Based on a quarterly payout of $0.25, the shares have a dividend yield of 2.82%.

Wells Fargo's valuation to the consensus forward earnings estimate is only slightly above the rest of the "big four" U.S. banks, despite being the strongest and steadiest earner among the group for many years. The company's operating return on average assets (ROA) was 1.41%, rising steadily over the past five years, from a low of 0.44% in 2008. Here's a quick comparison to the rest of the big four:

• Shares of Bank of America (C) were down over 3% on Thursday to close at $11.41. The stock trades for 8.9 times the consensus 2014 EPS estimate of $1.29. The company's ROA over the past five years has ranged from a negative 0.09% to a positive return of 0.26%. Bank of America is arguably the most risky play among the big four, with a political target on its back and legacy mortgage risk from the acquisition of Countrywide Financial in 2008.
• Citigroup (C) was down 2% to close at $42.35. The company's shares trade for 8.1 times the consensus 2014 EPS estimate of $5.20. Citi's ROA has ranged from a negative 1.28% to positive 0.57% over the past five years. Citigroup is in the midst of a multiyear transformation, as the company frees up excess capital by winding down non-core assets in the Citi Holdings subsidiary. The company on Tuesday agreed to acquire a $7 billion private label billion credit card portfolio from Capital One (COF). Acquisitions are among several possible strategies to help Citi recapture its $55 billion deferred tax asset.
• Shares of JPMorgan Chase (JPM) declined 1% to close at $48.25, trading for 8.4 times the consensus 2014 EPS estimate of $5.77. The company's ROA improved over the past five years from 0.21% to 0.94%. The improved results in 2012 came despite widely publicized hedge trading losses that totaled $6.2 billion.

As part of the consolidation of KBW's bank stock coverage after being acquired by Stifel Nicolaus, Mutascio was transferred to the KBW staff, and last Friday upgraded KBW's rating for Wells Fargo to "outperform" from "market perform."

Mutascio's price target for Wells Fargo's shares is $42, and he estimates the company will earn $3.59 a share this year, with earnings rising to $3.83 a share in 2014.

The analyst said in a report that with "the lack of differentiation in the valuations between highly profitable banks and those banks that are still generating ROAs of sub-1%, we believe the market is providing investors the ability to upgrade the quality of their bank stock portfolios at no extra charge." Mutascio also said the low forward P/E for Wells Fargo "is based on fears that the company is over-earning in the current mortgage banking environment."

According to Mutascio, Wells Fargo has four main offsets to declining mortgage volume and lower gains on mortgage sales. These include increased income from loan servicing, the "eventual reduction" in mortgage repurchase requests from investors, declining expenses following the foreclosure settlement with federal regulators, and the elimination of forgone revenue from the retention of mortgage originations."

-- Written by Philip van Doorn in Jupiter, Fla.

WFC data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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