Bank stocks have been on an absolute tear of the past several weeks, driven by optimism over a vaccine which eased concerns not only about widespread customer defaults, but also the possibility that interest rates may soon begin to rise.
One of the main beneficiaries of improving sentiment has been Wells Fargo (WFC). But it’s now worth asking whether optimism has run too far ahead of expectations. The troubled bank is set to report fourth quarter fiscal 2020 earnings results before the opening bell Friday. When will it be time to place a long-term bet on Wells Fargo shares? We now have that answer as WFC stock has been a hot commodity among the banks, skyrocketing more than 60% over the past two months.
Aside from progress on vaccines, investors are encouraged by the Fed’s decision in December to allow Wells Fargo to resume buying back shares and paying dividends. This is allowed on the condition that the total allocated to buybacks and dividend don’t exceed the average of what the bank earned in profit on a year-over-year basis. This is significant given that the Fed has previously forced Wells Fargo to cut its dividend 80% to only 10 cents per quarter. The Fed is now signaling that loan losses are no longer as risky as they were at the start of the pandemic.
From an operational perspective, there are also things the bank is expected to do to boost profitability. Jefferies analyst Ken Usdin noted that Wells Fargo various cost-cutting initiatives will be key to the bank’s ability to steadily increase earnings and its overall turnaround strategy. It would seem, though Wells Fargo still has some legacy challenges to address, the market is now willing to look beyond any near-term headwinds.
Essentially, analysts are saying, as economic conditions improve, Wells Fargo is now well-positioned to rebound strongly. As to whether optimism has run too far ahead of expectations, perhaps not. Even with the recent gains, WFC stock is trading at just ten times two-year forward earnings estimates, which is just above the bank’s five-year historical average of 9.7, making WFC the cheapest stock amongst its peers. That said, the bank must do its part on Friday to convince the market it can meet these expectations.
For the three months that ended December, analysts expect Wells Fargo to earn 59 cents per share on revenue of $18.11 billion. This compares to the year-ago quarter when earnings came to 60 cents per share on revenue of $19.86 billion. For the full year, earnings are projected to be 33 cents per share, down from $4.05 per share a year ago, while full-year revenue of $72.46 billion would decline 14.8% year over year.
The disruption caused by the pandemic has without a doubt taken a considerable toll on Wells Fargo’s operations. And it was more noticeable on Wells Fargo’s Q3 results which as the bank missed on the bottom line by 3 cents while revenue declined 14.3% year over year to $18.9 billion. But the quarter was not as bad as expected, given the deficits Wells Fargo has had to work with. Notably, the bank also generated a net profit of $2.0 billion during the quarter. But to keep the stock flying, Wells Fargo will need to improve on these numbers Friday.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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