Wells Fargo's LeBron James Earnings Streak A Hidden Opportunity

NEW YORK ( TheStreet) -- Expectations that Wells Fargo ( WFC) will snap a LeBron James-like streak of rising profits when the bank reports first quarter earnings on April 12, may present an opportunity for investors who are betting on sustained growth at America's top mortgage lender.

Wells Fargo -- now the largest stock holding of Warren Buffett's Berkshire Hathaway ( BRK.A) -- is forecasted by Wall Street analysts to post a drop in profitability following 12 straight quarters of earnings growth , as a torrid mortgage refinancing market cools and hits the San Francisco-based lender's bottom line.

Nevertheless, some investors and analysts, expect Wells Fargo to continue its growth streak as a natural recovery in the housing market led by new home construction and sales, takes hold and replaces a Federal Reserve and government-fueled mortgage refinancing boom that drove earnings in the second half of 2012.

For Wells Fargo to outperform Wall Street expectations and continue its earnings growth, the bank will need to post flat profitability in its mortgage banking unit by way of an up to 10% rise in home loan originations, an increase in mortgage servicing profitability and expense reductions, which could offset a sequential decline in refinancing activity of up to 40%, according Guggenheim Securities analyst Marty Mosby.

Meanwhile a stabilization of Wells Fargo's net interest margin could remove another major 2013 headwind and prove the bank's business model is more balanced than some on Wall Street expect.

During 2012, Wells Fargo earned roughly 50% of its revenue from fee generating businesses like mortgage banking and wealth management, and about 50% from margin businesses such as the bank's loan and securities portfolio.

The key to sustained earnings growth in fee-generating mortgage banking businesses and interest earning portfolios will be Wells Fargo's ability to navigate changing interest rate and macroeconomic scenarios, according to Mosby.

"Where I think the market is off, is that they are looking at a double jeopardy scenario that isn't possible," says Mosby, of Wells Fargo's interest rate sensitive mortgage banking unit and its securities portfolio.

If interest rates rise, mortgage banking revenue is likely to fall. However, Wells Fargo's net interest margin - the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- would likely rise according to Mosby. "You have a natural balance," he says.

Mosby says a first-quarter earnings beat will hinge on flat mortgage banking income and a three-to-four basis point quarter-over-quarter decline in the net interest margin.

Wells Fargo is expected to post earnings per share of 88 cents for the first quarter on net revenue of $21.5 billion and profits of $4.8 billion, according to the consensus analyst estimate compiled by Bloomberg.

That forecast represents a slight decline from the 92 cents Wells Fargo earned in the fourth quarter of 2012, as the bank's quarterly profit eclipsed $5 billion for the first time ever.

"The Wells Fargo story has been unexciting, simple and beautiful from the get go," says Bill Smead, head of Smead Capital, of the bank's post-crisis earnings.

While Smead forecasts Wells Fargo could earn $4.00 a share by 2013 or 2014, he highlights a dividend yield of close to 3% and the bank's current share price as sources of value for investors.

After passing Federal Reserve stress tests in March, Wells Fargo said it would boost its quarterly dividend 20% to 30 cents a share in the second quarter, while also increasing share repurchases in 2013.

" Wells Fargo is a buy unless you wouldn't be happy of it becoming a $50 stock or a 3% dividend yielder," Smead said. "We are just sitting around waiting for earnings power to be fully realized."

In the first quarter of 2013, Wells Fargo's shares gained just over 8%, slightly underperforming index gains posted by the S&P 500 and the Dow Jones Industrial Average.

Wells Fargo is a top 10 holding in two of Smead's mutual funds, the Smead Value Fund Institutional Class ( SMVMX) and the Smead Value Fund Investor Class ( SMVLX). Aflac ( AFC) and Bank of America ( BAC) are other large financials holdings in Smead funds.

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