This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Wells Fargo Could Hit Earnings Cliff Soon: Analyst

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) has posted 15 consecutive quarters of earnings growth, a winning streak that has to come to an end, according to Oppenheimer analyst Chris Kotowski.

The San Francisco-based lender reported better-than-expected earnings of $5.6 billion on revenue of $20.5 billion. Bottom-line earnings beat estimates of $5.26 billion but revenue fell short of estimates by $500 million, according to Bloomberg data.

The bank's performance is also impressive considering that rival JPMorgan Chase (JPM - Get Report) reported a loss, following a large addition to legal loss reserves.

Still, Kotowski said in a Oct. 11 report that "investors should be prepared for a time when the continual upward progression of EPS just can't be maintained."

Mortgage revenue took a deep hit in the latest quarter, as expected, with rising interest rates causing a plunge in refinancing volumes. The volatility in revenue should be mitigated by the bank's plans to lay off 5,300 employees. Kotowski is no fan of the mortgage business, with its inherent volatility and low profitability. "There is a reason why the thrifts that used to own this business traded at 5X," he noted.

The analyst also noted that the last two quarters have benefited significantly from reserve releases due to improving credit quality. Outside of credit quality improvements there wasn't much to cheer about the report, with loan growth being flat, mortgages way down and trust and investment fees which had held up in the prior quarter also weakening slightly.

"Unless we see some significant organic loan growth soon, Wells Fargo looks as if it will hit a bit of an earnings cliff soon," wrote Kotowski.

The analyst is also concerned that the share count has increased by 26 million at Wells Fargo, despite the fact that the bank has bought back 136 million shares over the past year. "We think a declining share count is important in a slow growth environment," the analyst said.

Kotowski acknowledged that Wells Fargo is still a very profitable, "high-quality" company that is reasonably valued, even when reserve releases are excluded from "core" EPS.

But he believes JPMorgan and Citigroup (C - Get Report) may offer better value for the time being.

1 of 2

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
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

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
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
C $53.85 0.67%
JPM $61.77 0.00%
WFC $55.55 0.00%
AAPL $128.75 -0.26%
FB $79.75 0.00%

Markets

DOW 18,288.63 +155.93 0.86%
S&P 500 2,117.39 +12.89 0.61%
NASDAQ 5,008.0960 +44.5690 0.90%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs