Wells Fargo & Company (WFC) is set to report its first-quarter results on April 12. Wall Street is bracing for the bank’s earnings and revenue to decline year-over-year. In this piece, I have delved into why it could be prudent to steer clear of the stock now.
For the first quarter, WFC’s EPS and revenue are expected to decline 11.4% and 2.8% year-over-year to $1.09 and $20.15 billion, respectively. The company has a solid earnings history, beating the consensus estimate in each of the trailing four quarters. WFC’s stock has gained 17.4% year-to-date and 52.5% over the past year to close the last trading session at $57.79.
On February 15, 2024, WFC confirmed that the Office of the Comptroller of the Currency (OCC) terminated a consent order it issued in 2016 regarding sales practices misconduct. The consent order forced the bank to revamp how it sold its retail products and services. This termination marks the sixth consent order that regulators have terminated since 2019.
For fiscal 2024, WFC expects its net interest income to be approximately 7% to 9% lower than fiscal 2023. The bank expects roughly $2.7 billion in gross expense reductions in 2024. Meanwhile, WFC expects to invest approximately $1.1 billion in incremental technology and equipment expenses. Keefe, Bruyette & Woods downgraded WFC to Market Perform from Outperform.
Here’s what you might want to consider ahead of its upcoming earnings release:
Robust Financials
For the fourth quarter ended December 31, 2023, WFC’s total revenue increased 2.2% year-over-year to $20.48 billion. Its net income applicable to common stock rose 9.8% year-over-year to $3.16 billion. Its EPS came in at $0.86, representing an increase of 14.7% year-over-year. Its ROE came in at 7.6%, compared to 7.1% in the prior-year quarter. In addition, its CET1 ratio came in at 11.4% compared to 10.6% in the year-ago quarter.
On the other hand, its provision for credit losses rose 34% year-over-year to $1.28 billion. Also, its net interest income declined 4.9% year-over-year to $12.77 billion.
WFC’s total revenue for the fiscal year ended December 31, 2023, increased 11.1% year-over-year to $82.60 billion. Its net income applicable to common stock rose 43.1% year-over-year to $17.98 billion. The company’s net interest income increased 16.5% over the prior-year period to $52.38 billion. Also, its EPS came in at $4.83, representing an increase of 47.7% year-over-year.
On the other hand, its provision for credit losses increased 252% year-over-year to $5.40 billion. In addition, its total assets declined 0.5% over the prior-year period to $1.89 trillion.
Mixed Analyst Estimates
WFC’s EPS and revenue for fiscal 2024 are expected to decrease 9.5% and 2.7% year-over-year to $4.75 and $80.33 billion, respectively. On the other hand, its EPS and revenue for fiscal 2025 are expected to increase 12.3% and 1.5% year-over-year to $5.33 and $81.55 billion, respectively.
Mixed Valuation
In terms of forward non-GAAP P/E, WFC’s 12.17x is 16.2% higher than the 10.47x industry average. Likewise, its 2.55x forward Price/Sales is 0.6% higher than the 2.53x industry average. Also, its 1.18x forward Price/Book is 12.4% higher than the 1.05x industry average.
On the other hand, WFC’s 0.91x forward non-GAAP PEG is 31.7% lower than the 1.33x industry average.
Mixed Profitability
WFC’s 0.99% trailing-12-month Return on Total Assets is 8.8% lower than the 1.09% industry average.
On the other hand, WFC’s 24.80% trailing-12-month net income margin is 5.5% higher than the 23.50% industry average. Furthermore, the stock’s 10.98% trailing-12-month Return on Common Equity is 0.5% higher than the industry average of 10.93%.
POWR Ratings Reflect Bleak Prospects
WFC has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WFC has a C grade for Value, which is in sync with its mixed valuation. Its mixed profitability is consistent with its C grade for Quality.
Also, its mixed analyst estimates justify its C grade for Sentiment.
WFC is ranked #4 out of 9 stocks in the Money Center Banks industry. Click here to access WFC’s Growth, Momentum, and Stability ratings.
Bottom Line
WFC’s EPS and revenue are expected to decrease year-over-year in the first quarter. With the central bank expected to cut interest rates later this year, WFC has forecasted its net interest income to decline approximately 7% to 9% compared to fiscal 2023 and underperform its peers. Meanwhile, given the challenges facing the commercial real estate sector, the bank expects additional losses in the coming quarters.
While the OCC terminated a consent order issued in 2016, eight consent orders remain, including one from the Federal Reserve that caps WFC’s asset cap at $1.95 trillion. Uncertainty over when the regulators will lift this asset cap continues to bother investors, as it has restricted the bank from growing.
WFC’s 12.17x forward non-GAAP P/E is 16.2% higher than the 10.47x industry average. Moreover, its revenue has shrunk at a 1.8% CAGR over the past five years. Also, its 0.99% trailing-12-month Return on Total Assets is 8.8% lower than the 1.09% industry average.
Considering these factors and given its stretched valuation, poor historical growth, and weak profitability, it could be wise to avoid the stock now.
Stocks to Consider Instead of Wells Fargo & Company (WFC)
The odds of WFC outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A (Strong Buy) and B-rated (Buy) stocks from the Foreign Banks industry instead:
Banco Macro S.A. (BMA)
Banco Santander, S.A. (SAN)
Nedbank Group Limited (NDBKY)
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
WFC shares fell $0.21 (-0.36%) in premarket trading Tuesday. Year-to-date, WFC has gained 18.24%, versus a 9.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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