Despite a meager 5% gain in Wells Fargo’s stock (NYSE: WFC) since March 23 (as compared to a jump of more than 35% in S&P 500), we believe Wells Fargo has a significant upside potential at the current price of roughly $30 per share. Why is that? The key is WFC’s stock is still about 50% lower than it was at the beginning of 2020 and around 38% behind the multi-year low at the end of 2018. Our dashboard Why Wells Fargo’s Stock moved -51.8% provides the key numbers behind our thinking, and we explain more below.
Some of this decline over the last 2 years could be explained by a roughly 4% reduction in Wells Fargo’s revenues from 2017 to 2019, which translated into a 13% drop in Net Income. The bigger decline in the net income figure was due to a surge in expenses as % revenues driven by higher compensation cost, employee benefits, and commission expenses even as the Fed’s growth restriction limited avenues of growth for the banking giant. Despite this, earnings per share remained largely constant due to the bank’s massive share buybacks. Specifically, the company has invested about $45.2 billion in repurchases in the last two years, resulting in about 11.5% lower outstanding shares. While Wells Fargo did buyback some shares in the first quarter, it has suspended its share repurchase program till the end of Q2 2020 due to uncertain market conditions.
Finally, Wells Fargo’s P/E ratio fell from about 13.3x at the end of 2017 to around 13.0x at the end of 2019. While Wells Fargo’s P/E is down to about 6.5x now, given the volatility of the current situation, there is a significant possible upside for Wells Fargo’s multiple when compared to levels seen in the past years – P/E of 13.0x at the end of 2019, and 10.0x as recently as late 2018.
So what’s the likely trigger and timing to this upside?
Wells Fargo is the biggest mortgage banker in the United States, with a sizable loan portfolio of around $399 billion in community loans and $456 billion in commercial loans (as per 2019 data). But businesses are staring at potential losses due to the combined effect of lower consumer demand, supply chain disruption, and global economic slowdown – exposing the bank to the possibility of sizable loan defaults. Additionally, it could increase the cost of funds for the bank, negatively impacting all its operations. While the company’s results for Q1 were on the similar lines, we believe Wells Fargo’s Q2 results will confirm this reality with a reduction in both community and commercial banking revenues.
However, we believe investors are overestimating the impact of a slowdown on Wells Fargo’s loan portfolio – very likely due to the sizable exposure to mortgages as well as oil & gas companies. Further, if there are signs of abatement of the crisis by the time Q2 results are announced, the company’s stock could see a notable uptick. Additionally, Wells Fargo’s 50% decline since the beginning of 2020 means that the stock has underperformed S&P 500 (-6%) and its peer Bank of America’s 32% drop over the same period. While we believe Wells Fargo’s stock is likely to remain around its current levels in the near future, we see a significant upside potential post coronavirus.
Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Wells Fargo’s peers. The complete set of coronavirus impact and timing analyses is available here.