Should You Still Be Bullish On Wells Fargo?

With shares of Wells Fargo & Company (NYSE:WFC) trading at around $34.80, is WFC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Wells_Fargo_Way2Save_SavingsWells Fargo just beat expectations, yet the stock is down over two percent. This usually happens when guidance is weak. In this case, the primary reason for the drop is net interest margin, which came in at 3.56 percent versus 3.89 percent last year.

Wells Fargo did show a profit of $5.1 billion in Q4, which is a 24 percent increase YoY. This is mostly due to strength in the mortgage business. Low interest rates have led to an increase in refinancing activity. EPS came in a $0.91, which beat expectations of $0.89. Revenue also increased 7 percent YoY and came in at $21.95 billion. Wells Fargo took in $152 billion in home mortgage applications, but this is down from $157 billion last year. Profits in the community banking division increased 14 percent, coming in a $2.9 billion.

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Let’s take a look at some more important numbers.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Wells Fargo is normal, and the balance sheet is strong. This is a common theme in the banking industry.

Debt-To-Equity

Cash

Long-Term Debt

WFC

1.17

$178.02 Billion

$130.80 Billion

BAC

2.50

$567.49 Billion

$286.53 Billion

C

2.89

$796.57 Billion

$271.86 Billion

 

T = Technicals on the Stock Chart Are Strong

Despite today’s drop, Wells Fargo still shows strong momentum. Despite underperforming Bank of America Corporation (NYSE:BAC) and Citigroup (NYSE:C) over the past year, results have been good. Wells Fargo currently yields 2.50 percent whereas Bank of American yields 0.30 percent, and Citigroup yields 0.10 percent.

1 Month

Year-To-Date

1 Year

3 Year

WFC

6.96%

3.42%

23.42%

28.83%

BAC

11.54%

1.55%

78.69%

-28.85%

C

15.11%

8.22%

42.88%

19.50%

 

At $34.80, Wells Fargo is currently trading above all its averages.

50-Day SMA

33.53

100-Day SMA

34.07

200-Day SMA

33.54

 

E = Earnings Have Been Improving

On an annual basis, earnings have been improving since 2008. Earnings have also surpassed 2007 levels, which is uncommon. Revenue hasn’t been as impressive.

2007

2008

2009

2010

2011

Revenue ($)in billions

53.27

51.63

98.64

93.25

87.60

Diluted EPS ($)

2.38

0.70

1.75

2.21

2.82

 

We already know what happened this quarter. Now let’s take a look at past results as well.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

21.26

20.06

23.00

22.61

22.48

Diluted EPS ($)

0.72

0.73

0.75

0.82

0.88

 

T = Trends Support the Industry

Trends support the industry in large thanks to Big Ben’s Money Machine. As long as interest rates are kept at record lows, the industry will continue to hum. However, once reality revisits the economic landscape, there will be a reversal. The good news is that Wells Fargo is one of the most fiscally responsible banks in existence. This isn’t a company that gets greedy with exotic schemes. This is a company that believes in traditional lending above all else. Unfortunately, if the industry gets hit in the future, Wells Fargo will be guilty by association. On the other hand, it will weather that storm just like it has weathered all other storms. Remember, the good guys always win in the end.

Conclusion

Wells Fargo has a profit margin of 23.18 percent, an ROE of 12.36 percent, operating cash flow of $26.06 billion, a healthy balance sheet, a history of strong stock performance, and a reputation for being a rock in an unpredictable industry. Let’s not forget dividend payments, either. If you’re looking for a long-term investment in the banking industry, then you won’t find a better option.

Wells Fargo is an OUTPERFORM.

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