Wells Fargo Earnings Preview: Marginal Revenue Growth Expected

Investors will be looking for Wells Fargo to add to its 11 consecutive quarters of profit growth, despite the uncertainty surrounding the fiscal cliff that plagued the most recent quarter.

Expectations

Analysts on average predict that Wells Fargo will report revenue for the quarter that rose more than three percent year-over-year to $21.29 billion. However, per-share earnings are expected to come to $0.89, which would be about 18 percent higher than in the same quarter of last year. That consensus earnings estimate is the same as it was 60 days ago. But analysts have underestimated earnings per share (EPS) in all but one of the past seven quarters. The third-quarter EPS of $0.88 beat the consensus estimate by a penny.

Wells Fargo attributed the record third-quarter earnings to the boom in its mortgage lending business, which it said would likely last a few more quarters. But revenue came in below projections as the net interest margins shrank. The share price rose marginally in the week following the third-quarter report.

The analysts' consensus full-year forecast calls for $3.34 per share earnings on revenue of $85.68 billion. That would be up from $2.82 per share and $80.95 billion in the previous year. That consensus EPS estimate has slipped in the past 60 days from $3.35.

The Company

Wells Fargo & Company is the second largest bank in the United States in deposits and the largest money center bank by market capitalization, which is nearly $184 billion. It has about 9,000 locations in 35 countries. This S&P 500 component was founded in 1852 and is headquartered in San Francisco. John Stumpf has been the chief executive since June 2007 and chairman since January 2010.

Competitors include Bank of America (NYSE: BAC), Citigroup (NYSE: C) and J.P. Morgan Chase (NYSE: JPM). All three are scheduled to report their four-quarter results next week. Analysts predict the latter two will post strong results, while Bank of America is expected to report smaller EPS and revenue relative to the previous year.

During the three months that ended in December, Wells Fargo elected a new board member, launched a new online Business Credit Center for small business owners, increased its share buyback program and approved a record amount in SBA loans.

Performance

Wells Fargo's long-term EPS growth forecast is about nine percent, and the price-to-earnings (P/E) ratio is less than the industry average. The operating margin is greater than the industry average, and the return on equity is better than those of the competitors mentioned above. The number of shares sold short represents less than one percent of the float. The short interest has been dwindling since October.

Of the 36 analysts surveyed by Thomson/First Call who follow the stock, 21 recommend buying shares and only one recommends selling. The analysts believe the stock has some room to run as their mean price target represents about 10 percent potential upside. That target price is a level the stock has not seen since 2008.

Shares have traded mostly between $32 and $36 since March. However, the share price is more than 18 percent higher than a year ago. It is about four percent above both the 50-day and 200-day moving averages. Over the past six months, the stock has underperformed the competitors mentioned previously, as well as the S&P 500.

ACTION ITEMS

Bullish: Investors interested in exchange traded funds invested in Wells Fargo might want to consider the following trades:

• iShares S&P Global Financials (NYSE: IXG) is more than 29 percent higher than a year ago.
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• iShares Dow Jones U.S. Financial Sector (NYSE: IYF) is almost 25 percent higher than a year ago.
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• iShares Russell 1000 Value Index (NYSE: IWD) is about 15 percent higher than a year ago.
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Bearish: Traders may prefer to consider these alternative positions in the same industry:

• Bank of America (NYSE: BAC) is up about 91 percent in the past year.
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• Citigroup (NYSE: C) is up about 46 percent in the past year.
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• J.P. Morgan (NYSE: JPM) is up almost 29 percent in the past year.
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