The fourth-quarter earnings season begins this week. While the earnings calendar for the week is quite light and we don’t have many releases lined for the week, Wells Fargo will ring the bell for bank earnings.
The earnings of banks always attract outsized attention. The banking sector is a reflection of the economy and bank earnings tell us about the health of the economy. What’s the forecast for Wells Fargo stock and what should investors expect from the company’s fourth-quarter earnings?
Bank stocks have outperformed
Bank stocks outperformed the markets by a wide margin in 2021. Within banks, Wells Fargo’s performance stands out and it is up almost 65% over the last year. While Berkshire Hathaway chairman Warren Buffett lost faith in the company and sold almost all the shares, investors went on a buying spree. At its peak, Berkshire Hathaway was the largest investor in Wells Fargo and was holding almost a 10% stake. However, over the last 18 months, Buffett has turned cautious of the banking sector. The conglomerate fully exited financial companies like Goldman Sachs and JPMorgan Chase while maintaining a tiny stake in Wells Fargo.
Wells Fargo has been in controversies
Wells Fargo has faced multiple controversies over the last five years including opening fraudulent accounts. These controversies kept a lid on its stock prices as investors were wary of investing in the troubled bank. However, the bank has been trying to transform and repair the damage to its brand. In late 2019, Charlie Scharf took over as the CEO of the company and had his task out.
“We all have to demand more from each other. The seriousness of what we do brings tremendous responsibility. Our work has tremendous impact upon people. We need to recognize that and make sure that we’re doing everything we can to operate the company to the highest standards of operational excellence,” said Scharf at the first town hall.
The transformation is visible in Wells Fargo’s financial performance and markets have taken a note as is reflected in its stock price. Wall Street analysts have also been taking a bullish view of the stock especially as US interest rates continue to rise.
Interest rates are on a rise
The minutes of Fed’s December meeting were hawkish than expected. While the faster pivot towards monetary policy normalization is negative for stocks, especially the growth names, it is positive for banks. Banks borrow at the short end of the curve and lend at the long end. They thereby benefit from a steep yield curve and higher long-term interest rates.
Barclays upgraded Wells Fargo stock
Barclays is of the view that Wells Fargo is among the biggest beneficiaries of the rising rate environment. “WFC stands to benefit the most of our coverage universe from higher interest rates while it has made significant investments in its control functions since its retail banking sales practice issues came to light. The eventual lifting of regulatory restrictions also represents a potential catalyst looking out,” said Barclays’ analyst Jason Goldberg.
He also upgraded Wells Fargo stock from equal weight to overweight and raised his target price to $62. Along with Wells Fargo, Goldberg is bullish on the entire large-cap bank universe and said “After meaningfully underperforming in 2020, Large-Cap Bank stocks outperformed in 2021, rising 37% compared to the S&P 500′s 27% increase. We believe this outperformance can continue into 2022. We are above consensus EPS for the vast majority of our coverage for both 2022 and 2023.”
Morgan Stanley is also bullish on Wells Fargo
Morgan Stanley also echoed similar views and upgraded Wells Fargo stock to overweight. “We’re getting back onboard our Wells Overweight call, ~2 months after our downgrade to Equal-weight. Why the change? Biggest driver is higher Fed Funds Futures, as Wells is the most asset sensitive stock in our coverage.” However, the brokerage downgraded Citigroup stock citing a lack of near-term catalysts. Citigroup stock has been consistently underperforming peers over the last decade.
Wells Fargo stock forecast
Wall Street analysts have a consensus buy rating on Wells Fargo stock and of the 29 analysts covering the stock, 19 have a buy rating while 10 have a hold rating. Its median target price of $57 is a 4% premium while the street high target price of $70 is a 27.7% premium over current prices.
Analysts polled by TIKR expect Wells Fargo to report revenues of $18.8 billion in the fourth quarter, a YoY increase of 3.9%. The company’s adjusted EPS is expected to rise 42% to $0.99 over the period. Banks have been benefiting from improving credit quality and lower loan loss provisions. As the economic momentum continues and the Fed embarks on rate hikes, bank stocks could do well in 2022 as well.
CFRA Research analyst Kenneth Leon is bullish on Wells Fargo stock heading into the earnings. “We think WFC should benefit from favorable industry trends, and management’s focus on execution has improved. While the pandemic remains uncertain, we expect Q4 2021 and 2022 to show improved loan activity and higher net interest income than the first half 2021,” said Leon in his note.
Should you buy Wells Fargo stock?
Wells Fargo stock trades at an NTM (next-12 months) PE multiple of 14.6x and a price-to-tangible book value multiple of 1.53x. The multiples look fair looking at the macroeconomic environment. Meanwhile, while there doesn’t look much scope for multiple expansion, earnings growth could drive the stock in the medium term.
How to invest in bank stocks?
An alternative approach to investing in bank stocks could be to invest in ETFs that invest in banks like Wells Fargo.
Through a financial ETF, you can diversify your risks across many companies instead of just investing in a few companies. While this may mean that you might miss out on “home runs” you would also not end up owning the worst-performing stocks in your portfolio. The Financial Select Sector SPDR Fund has almost 39% of its portfolio in banking stocks and could be a good way to play the sector.
By investing in an ETF, one gets returns that are linked to the underlying index after accounting for the fees and other transaction costs. There is also a guide on how to trade in ETFs.