Wells Fargo (NYSE: WFC) stock has declined by close to 39% since early February after the WHO declared the Coronavirus a global health emergency, while JPMorgan (NYSE:JPM) stock has fared slightly better and lost 27% of its value. The lockdown in various parts of the world has hurt the banking industry worldwide, with more weakness to come over the coming months. Additionally, consumer and commercial banking are key revenue streams for Wells Fargo and JPMorgan, which will remain under pressure over subsequent quarters with the Fed slashing interest rates to near-zero, coupled with lower consumer activity levels and expected loan defaults due to potential losses driven by the global slowdown. However, we believe JPMorgan will likely fare better than Wells Fargo because of its more diversified business model.
In its recently released Q1 2020 results, Wells Fargo reported an 18% decline in revenues y-o-y. Further, we believe WFC’s fiscal Q2 results in July will confirm weak economic conditions and could come with 2020 revenue expectations 11% lower than 2019. This could potentially result in Wells Fargo’s P/E multiple remaining around the current level of 7x, with the stock price hovering around the current level of $28. JPM will likely suffer, but less so – with revenue expectations for 2020 being around 7% less than the figure in 2019 at the time of its fiscal Q2 2020 earnings in July. With a P/E multiple around 9, the stock will likely see some upside over the coming months.
Our conclusion is based on our detailed dashboard analysis, ‘Is Wells Fargo Expensive Or Cheap After A -39% Move vs. -27% for JPMorgan ?’ wherein we compare trends in key metrics for the two banks over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.
Why Has JPMorgan Outperformed Wells Fargo Over Recent Weeks?
Wells Fargo is more dependent on consumer and commercial banking, which contributed around 72% of its revenues in 2019, whereas JPMorgan’s dependence on the above revenue stream was roughly 51%. Further, JPMorgan derived around 25% of its revenues from sales & trading in 2019, which is expected to benefit due to higher volatility in the market. These activities contribute less than 5% to Wells Fargo’s top line.
JPMorgan’s P/E based on 2019 earnings has declined from over 12.8x in 2019 to 8.9x currently, while Wells Fargo’s multiple has declined from 13x to about 7x. The slightly higher decline in Wells Fargo’s multiple can be attributed to the difference in their business model, as highlighted above. Further, both JPMorgan and Wells Fargo’s P/E multiples appear to have priced in the risks the banks’ revenues and margins are facing. Notably, JPM’s P/E is at the lowest level in at least six years and is 13% below the figure at the end of 2018. On the other hand, Wells Fargo’s P/E is also at the lowest level in at least six years and is around 30% below the level seen at the end of 2018 – indicating that the market has already price in the lower revenue expectations even as the Fed’s growth restrictions on the bank continue to weigh on earnings.
Overall, it’s likely that JPMorgan stock will continue to outperform Wells Fargo, as the latter faces more risks to its revenues and margins as compared to its peer. Likely that the ground reality for Wells Fargo will be confirmed during its Q2 results when weak results will be coupled with tough guidance for 2020 – especially if the outbreak hasn’t been contained by then.
- Trends in Stock Price over the years: Over 2009-2019, Wells Fargo’s stock has grown at 0.5x the rate of JPMorgan’s stock.
- Wells Fargo stock went from $20.57 at the end of 2009 to $53.23 at the end of 2019, representing a change of about 159%.
- During the same time period, JPMorgan stock went from $32.14 to $137.09, representing a change of almost 327%.
- Trends in P/E Multiple over the years: Based on trailing 2019 P/E ratios, while Wells Fargo looks comparable to JPMorgan, it is more expensive than it has been historically.
- P/E ratio of both the banks has followed a more or less similar trend.
- Historical Revenue Growth: JPM 2014-19 annualized revenue growth of 4.2% is 21x that of the 2014-19 WFC’s annualized Revenue growth rate of 0.2%.
- Historical EPS Growth: JPM 2014-19 annualized EPS growth of 15.1% is -37.8x that of the 2014-19 WFC’s annualized EPS growth rate of -0.4%.
But How Long Will Wells Fargo Stock Remain Under Pressure?
- The expected timeline for recovery in global economic conditions, and in Wells Fargo’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
- We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times
- Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Wells Fargo’s multinational peers including Goldman Sachs and Morgan Stanley. The complete set of coronavirus impact and timing analyses is available here.
- Overall, we believe Wells Fargo’s stock price at levels of $34 (Trefis price estimate) and below provides a buying opportunity for investors willing to be patient.