Wells Fargo Slips as Analysts Disagree

NEW YORK ( TheStreet) -- Wells Fargo ( WFC) 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) 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) 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) 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) 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."

Wells Fargo's "plans are constantly updated around optimizing staffing levels, but timing might modestly lag a decline in originations," Usdin wrote, hinting at significant staff reduction if mortgage volumes decline as expected.

Hagerman estimates Wells Fargo will earn $3.65 a share this year, with EPS growing to $4.00 in 2014.

"To be sure, the company's top-tier profitability metrics (an estimated +16% ROTCE and 1.34% ROAA in 2013E), balanced revenue stream, and relatively benign risk profile are deserving of a premium valuation," Hagerman wrote. But he sees limited upside for the stock, "given expectations for more modest earnings growth into '14."

Wells Fargo would need to increase its annual earnings to $4.75 "to rationalize material upside to the current price target," according to Hagerman. But he doesn't expect earnings to reach that level until 2015, "at the earliest."

"While we consider WFC a high-quality, core holding for investors (company continues to redeploy 50-60% of earnings via dividends and share repurchases), meaningful outperformance of WFC shares at this juncture seems unlikely," he wrote.

WFC Chart WFC data by YCharts

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

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

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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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