Wells Fargo & Company ( WFC ) will release its first quarter earnings on April 12. The bank is expected to report a decline in revenues and profits during the quarter last year. Therefore, should investors consider investing in the stock ahead of its earnings? Read on to learn my take.
Wells Fargo & Company (WFC) is set to report first quarter results on April 12. Wall Street is bracing for the bank's revenue and earnings to fall year over year. In this piece, I delve into why it might be prudent to exit the stock now.
For the first quarter, WFC's EPS and revenue are expected to fall 11.4% and 2.8% year-over-year to $1.09 billion and $20.15 billion, respectively. The company has a consistent earnings track record, beating the consensus estimate in each of the trailing four quarters. Shares of WFC have 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, the WFC confirmed that the Office of the Comptroller of the Currency (OCC) terminated a consent order was issued in 2016 regarding improper sales practices. The consent order forced the bank to revamp the way it sold its retail products and services. This termination marks the sixth consent order that regulators have completed since 2019.
For fiscal 2024, WFC expects its net interest income to be approximately 7% to 9% lower than fiscal 2023. The bank expects approximately $2.7 billion in gross expense reductions in 2024. Meanwhile, WFC expects to invest approx. $1.1 billion in additional technology and equipment spending. Keefe, Bruyette & Woods lowered the WFC category to Market Perform by Outperform.
Here's what you might want to consider before the next earnings release:
Strong finances
For the fourth quarter ended December 31, 2023, WFC's total revenue rose 2.2% year over year to $20.48 billion. Its net income applicable to common shares rose 9.8% year over year to $3.16 billion. Its EPS came in at $0.86, representing a year-over-year increase of 14.7%. Its ROE reached 7.6%, compared to 7.1% in the year-ago quarter. Furthermore, its CET1 ratio reached 11.4% compared to 10.6% in the year-ago quarter.
On the other hand, its provision for loan losses rose 34% year-over-year to $1.28 billion. Also, its net interest income fell 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 shares rose 43.1% year over year to $17.98 billion. The company's net interest income rose 16.5% over the year-ago period to $52.38 billion. Also, its EPS came in at $4.83, representing a year-over-year increase of 47.7%.
On the other hand, its provision for loan losses rose 252% year-over-year to $5.40 billion. Additionally, its total assets fell 0.5% over the year-ago period to $1.89 trillion.
Analysts mixed estimates
WFC's EPS and revenue for fiscal 2024 are expected to decline 9.5% and 2.7% year-over-year to $4.75 billion and $80.33 billion, respectively. On the other hand, its EPS and revenue for fiscal 2025 are expected to grow 12.3% and 1.5% year-over-year to $5.33 billion and $81.55 billion, respectively.
Mixed rating
In terms of non-GAAP forward P/E, WFC's 12.17x is 16.2% higher than the industry average of 10.47x. Likewise, its forward price/sales of 2.55 times is 0.6% higher than the industry average of 2.53 times. Also, its forward price/book of 1.18x is 12.4% higher than the industry average of 1.05x.
On the other hand, WFC's 0.91x forward non-GAAP PEG is 31.7% lower than the industry average of 1.33 times.
Mixed profitability
WFC's 0.99% trailing 12-month return on total assets is 8.8% lower than the industry average of 1.09%.
On the other hand, WFC's trailing 12-month net income margin of 24.80% is 5.5% higher than the industry average of 23.50%. Additionally, the stock's trailing 12-month return on common equity of 10.98% is 0.5% higher than the industry average of 10.93%.
POWR ratings reflect a bleak outlook
WFC has an overall rating of D, which equates to a sell in our POWR rating system. of POWR Ratings were calculated by considering 118 different factors, with each factor weighted to an optimal scale.
Our proprietary rating system also rates each stock based on eight different categories. WFC has a C grade for value, which is in sync with its mixed rating. Its mixed profitability is consistent with its C grade for Quality.
Also, its mixed analyst ratings justify a 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.
end
WFC's EPS and revenue are expected to decline year-over-year in the first quarter. With the Central Bank expected to cut interest rates later this year, WFC has forecast its net interest income to fall roughly 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 ended one consent order issued in 2016, eight consent orders remain, including one from the Federal Reserve that limits the capital of WFC's assets to $1.95 trillion. Uncertainty about when regulators will lift this asset limit continues to worry investors, as it has limited the bank's growth.
WFC's 12.17x forward non-GAAP P/E is 16.2% higher than the industry average of 10.47x. Furthermore, its revenue has shrunk at a CAGR of 1.8% over the past five years. Also, its 0.99% trailing 12-month return on total assets is 8.8% lower than the industry average of 1.09%.
Considering these factors, and given its stretched valuation, weak historical growth and weak profitability, it might be wise to avoid the stock now.
Stocks to consider instead Wells Fargo & Company (WFC)
The chances of WFC performing well in the coming weeks and months have been significantly compromised. However, there are many industry peers with impressive POWR ratings. So consider these three stocks rated A (Strong Buy) and B (Buy) by Foreign banks industry instead:
Banco Macro SA (BMA)
Banco Santander, SA (SAN)
Nedbank Group Limited (NDBKY)
What should be done next?
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Shares of WFC were down $0.21 (-0.36%) in premarket trading on Tuesday. Year-to-date, WFC has gained 18.24%, versus a 9.47% gain in the benchmark S&P 500 over the same period.
About the Author: Dipanjan Banchur
Since he was in high school, Dipanjani was interested in the scholarship. This led him to obtain a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a keen interest in reading and analyzing emerging trends in financial markets.
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