Inside Wall Street: Wells Fargo outruns peers

Despite its steady leap to record highs since 2011, shares of the 4th largest US bank remain undervalued.

By Gene Marcial Aug 5, 2013 10:32AM

Bank sign copyright John Foxx, Stockbyte, Getty ImagesThe once beleaguered financial stocks are now among the big-cap stalwarts leading the bull parade, which has catapulted the Dow Jones industrials and S&P 500 ($INX) to new all-time highs. But for investors who have missed the robust upswing this year, there's still some opportunities left to catch.

One of the global financial services giants that have steadily pulled ahead but remains underpriced is Wells Fargo (WFC), whose stock has leaped very close to its all-time high of $44.79 share, closing at $44.53 on Aug. 2, 2013. 

Back in 2011, the stock was struggling at around $26 a share. Now investors, who own the stock as a core long-term holding, expect it to hit $50 this year.

In market capitalization, Wells Fargo is the largest U.S. financial institution, with $229 billion, ahead of JPMorgan Chase's (JPM) $209 billion. And Wells Fargo's total assets of nearly $1.5 trillion places it behind JPMorgan's $2.4 trillion. A diversified financial holding company, Wells Fargo's provides a wide array of services worldwide, including banking, insurance, investments, mortgage, and finance.

"While Wells Fargo shares currently trade at a premium to other large-cap bank peers at 150% of book value and 190% of tangible book, we believe this is justified by the company's superior returns," says Joe Morford, banking analyst at RBC Capital Markets, who rates the stock as outperform. And he emphasizes that based on price-earnings valuation, "the shares look undervalued, trading much more in line with its peer group at only slightly more than 10 times next year's earnings."

Morford says Wells Fargo will weather the challenging environment better than most other banks mainly because of its "well diversified business model and shareholder-driven management" that has demonstrated its ability to execute.

With the banking industry under siege during the financial meltdown, Wells Fargo has retained its image of trustworthiness.

"By virtually every measure of bank safety and profitability, Wells Fargo is the leader of the big bank pack," says Stephen Leeb, editor of the Complete Investor newsletter, and president of Leeb Asset Management. He projects long-term growth of at least 10% for he company, which translates to a price-earnings-to-growth ratio of under 1.

"With its better than 3% dividend yield and growing dividend payouts, this is one of the best total-return stocks you can buy," argues Leeb.

Despite its already vey broad reach, he notes, the company still has lots of room to grow, such as selling additional services to households (over 30% of U.S. households have a financial relationship with Wells Fargo), and by expanding into regions not well served. As an example, Wells Fargo has fewer branches in New York than in New Mexico. Nearly 75% of the company's revenues and 82% of operating profits come from the consumer sector, which Leeb considers highly positive.

Jason M. Goldberg, analyst at Barclays Capital, who rates Wells Fargo as overweight, notes that the bank benefits from a talented management team, diversified business mix, and a retail deposit base that helps drive its growth above most of its large-cap U.S. peers. His price target for the stock is$48 a share, but he argues that "if mortgage banking activity comes in better that than expected and loan growth accelerates from our 4% expectations," earnings could exceed $4 a share and shares to trade at 13 times 2014 per-share earnings, or a stock price of $50 a share.

Goldberg currently forecasts earnings of $3.85 a share for 2013 and $3.95 for 2014. He notes that "in keeping with tradition, Wells Fargo reported (in its second-quarter results) its ninth consecutive quarter of records earnings per share, as results benefited from a lower-than-anticipated loan loss provision s and above forecast mortgage metrics."

gene marcial

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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