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Wells Fargo Slips as Analysts Disagree

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) has been the strongest and most consistent earnings performer among the "big six" U.S. banks over the past three years, but analysts have differing views on the stock.

Jefferies analyst Ken Usdin on Friday reiterated his "buy" rating for Wells Fargo, while raising his price target for the shares to $44 from $42, writing in a note to clients, "while the operating and regulatory environment is clearly challenging, revenue diversity and credit/expense leverage should allow the company to grow EPS going forward."

Meanwhile, Sterne Agee analyst Todd Hagerman on Friday downgraded Wells Fargo to a "neutral" rating from a "buy," writing to clients that "although WFC's outlook remains constructive, particularly expense leverage tied to the company's efficiency initiative and legacy servicing/mortgage-related costs, earnings growth is clearly moderating into '14."

Hagerman's price target for Wells Fargo was unchanged, at $42.

Wells Fargo's shares were slipping 0.7% Friday to $40.66, paring its 2013 advance to 19% after gaining 24% last year. The shares trade for 10.5 times the consensus 2014 earnings estimate of $3.90 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $3.71.

The stock's valuation is higher than the rest of the "big six" banking club, and the premium seems warranted, considering how strong and consistent Wells Fargo's earnings performance has been. The company's first-quarter return on average tangible common equity (ROTCE) was 16.27%, while ranging from 14.89% to 16.32% over the past three full years, according to Thomson Reuters Bank Insight.

Here's how Wells Fargo's valuation and ROTCE compares to the rest of the big six:
  • Shares of Bank of America (BAC - Get Report) closed at $13.21 Thursday and traded for 10.2 times the consensus 2014 EPS estimate of $1.30. The company's first-quarter ROTCE was 3.69%, and the ROTCE ranged from a negative 1.62% to 2.65% over the past three full years.
  • Citigroup (C - Get Report) closed at $50.29 Thursday and traded for 9.2 times the consensus 2014 EPS estimate of $5.44. The company's ROTCE for the first quarter was 9.52%. The ROTCE has ranged from 4.96% to 8.61% over the past three years.
  • JPMorgan Chase (JPM - Get Report) closed at $54.17 Thursday and traded for 9.1 times the consensus 2014 EPS estimate of $5.96. JPMorgan's first-quarter ROTCE was 16.82% and the ROTCE has ranged from 14.69% to 14.92% over the past three years.
  • Shares of Morgan Stanley (MS - Get Report) closed at $26.37 Thursday and traded for 10.3 times the consensus 2014 EPS estimate of $2.55. The company's first-quarter ROTCE was 7.62%. The ROTCE for the past three full years has ranged from 2.23% to 15.29%.
  • Goldman Sachs (GS) closed at $165.82 Thursday and traded for 10.8 times the consensus 2014 EPS estimate of $15.35. Goldman's first-quarter ROTCE was 13.83%, and the ROTCE has ranged from 7.02% to 13.58% over the past three years.

Usdin estimates that Wells Fargo will earn $3.80 a share this year, with EPS rising to $3.85 in 2014.

A major challenge faced by the bank is the decline in mortgage refinancing volume. Usdin expects the company's mortgage revenue to decline from $11.6 billion in 2012 to $10.2 billion this year, and decline further to $8.4 billion in 2014. But the analyst sees some positives, including "room for credit costs to decline," with quarterly provisions for loan losses possibly declining by $100 million, "as severities in residential real estate improve."
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