Wells Fargo Earnings Preview: Wells Fargo Should Comfortably Beat Pessimistic FY19 Earnings Expectation

January 13th, 2020 by Trefis Team
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Wells Fargo (NYSE: WFC) is slated to release its Q4 and full-year 2019 results on Tuesday, January 14. Trefis details expectations from the geographically diversified banking giant in an interactive dashboard, parts of which are highlighted below. We believe that Wells Fargo’s FY 2019 revenues and earnings would beat consensus. We expect the bank’s revenues to be around $85.0 billion despite continuing headwinds from the Fed’s growth restriction – higher than the consensus estimate of $84.6 billion. Also, the EPS figure is likely to be around $4.66 due to a combination of lower expenses and a slightly higher drop in revenues weighing on the net income margin, which is well above the consensus estimate of $4.54. While we expect Wells Fargo to beat revenue as well as earnings expectations for FY 2019, we believe that its stock is unlikely to witness a sizable gain after results are announced. Our forecast indicates that the bank’s current stock price of $53 is already 5% above out estimate for Wells Fargo’s valuation of $51 a share.

(1) Wells Fargo’s revenues are expected to drop 1.6% from $86.4 billion in 2018 to $85.0 billion in 2019, however, it would still beat the consensus estimates

  • Trefis estimates Wells Fargo’s 2019 revenues to be $85 billion, slightly above the consensus estimate of $84.6 billion.
  • Total revenues have fluctuated in recent years, from $88.3 billion in 2016 to $88.4 billion in 2017, before reducing to $86.4 billion in 2018 as the Fed’s growth restrictions forced Wells Fargo to trim several operating units to focus on growth in its core loans-and-deposits business
  • We expect revenues to have dropped 1.6% y-o-y in 2019, primarily driven by a 2.5% decrease in Community Banking business due to lower net interest margin and a largely stagnant loan portfolio.
  • Community banking revenues are expected to recover in the subsequent years and grow at an average annual rate of 1.5%. This would enable it to cross $40.8 billion by 2020.
  • Wholesale banking drives more than 70% of its revenues from commercial lending, but should have dropped in 2019 due to negative market conditions. However, growth in 2020 should help wholesale banking revenues cross $28.5 billion this year.
  • Further, Wealth & Investment Management revenues would remain more or less unchanged over the next three years.
  • Notably, we expect Wells Fargo’s revenue to grow 1.3% in 2020 to cross $85.7 billion.

Our interactive dashboard analysis, How Does Wells Fargo Make Money?, provides an in depth view of the company’s revenues along with our forecasts for the FY 2020.

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(2) EPS is expected to increase 9% from $4.28 in 2018 to $4.66 in 2019

  • Wells Fargo’s 2019 earnings per share (EPS) is expected to be $4.66 per Trefis analysis, 3% higher than the consensus estimate of $4.54 per share
  • Although the revenues are expected to drop as detailed above, a steady reduction in Shares Outstanding will drive EPS growth of 9% in 2019.
  • As we forecast Wells Fargo’s Revenues to drop at a faster rate than Expenses in 2019 (1.6% vs. 1.3%), this will result in a slight decrease in Wells Fargo’s Net Income Margin figure from 23.9% in 2018 to 23.7% in 2019.
  • For 2020, we believe that slight growth in revenues and expenses will result in the adjusted net income margin figure improving to 23.8%

(3) Stock price estimate slightly below market price

  • A trailing P/E multiple of 11.0x looks appropriate for Wells Fargo’s stock, as opposed to the current implied P/E multiple of 11.6x
  • Trefis’ forecast for Wells Fargo’s 2019 earnings is slightly higher than market expectations, but the P/E multiple is lower. This works out to a fair value of $51 for Wells Fargo’s stock as opposed to the current market price around $53.

You can input your estimates for Wells Fargo’s key metrics in our interactive dashboard for Wells Fargo’s pre-earnings, and see how that will affect the company’s stock price.

 

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