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Wells Fargo's a Buy Ahead of Earnings

NEW YORK ( TheStreet) -- Shares of Wells Fargo (WFC - Get Report) closed down 1.5% to $42.07 on Wednesday following the bank's downgrade by analyst Scott Siefers of Sandler O'Neil. Seifers, who now has a hold rating on the stock, cited Wells Fargo's valuation as being higher when compared to its peers.

However, from my vantage point I believe Wells Fargo's price-to-earnings ratio, which is two points higher than JPMorgan Chase (JPM), is deserved. But this is not the first time Wells Fargo has created doubt among analysts. There were plenty of questions when the bank reported fiscal first-quarter earnings results in April.

The Street wasn't pleased with management's inability to grow the bank's usually strong mortgage lending business. The stock dropped 5% in the days that followed. I didn't disagree that a 13% sequential drop in loan originations was disturbing. But I also didn't think it was time to panic either.

Given Wells Fargo's excellent track record of execution and solid leverage, I was already looking forward to the second quarter. I said: "With better improvement, these shares should reach $45 sometime in the second half of the year."

Since that article, the stock has been up by as much as 15%. Wells Fargo will report second-quarter earnings on Friday. With shares now trading at less than 10% away from my year-end target of $45, I don't see a reason to change course, especially given the bank's much improved growth prospects on the likelihood of higher interest rates.
[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/11974474/1/wells-fargo-pnc-fall-on-downgrades-ahead-of-2q-reports.html"><em>Wells Fargo, PNC Fall on Downgrades Ahead of 2Q Reports</em></a>]

Although the financial sector has done well in terms of stock performance, overall operational performance has been pretty lethargic in terms of actual growth. This was evident not only in Wells Fargo's first-quarter performance but the results from Bank of America (BAC) and Citigroup (C) yielded similar lackluster outcomes.

For Wells Fargo, however, given the 2% year-over-year decline in expenses, it was clear that management placed an emphasis on cost cutting. I've said it before: Investors shouldn't discount the level of difficulty there is in reducing expenses amid a highly competitive banking market. I believe Siefers is overlooking this fact.

In that regard, I don't believe Wells Fargo's second-quarter results will disappoint on Friday. Analysts are looking for earnings of 93 cents per share on revenue of $21.2 billion, which represents 12% year-over-year earnings growth and a slight decline (40 basis points) in revenue. I think Wells will surprise the Street with a beat on revenue.
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