North America

Earnings Preview: Wells Fargo Q3 2017 (WFC)

By: Craig Bowles

Overview

Wells Fargo & Company (WFC) is scheduled to report 3Q 2017 earnings before the opening bell on Friday, October 13th. The results are expected to come through at approximately 8:00 a.m. ET with a conference call webcast at Wells Fargo Investor Relations to follow at 10:00 a.m. Wells Fargo will follow Bank of America (BAC) earlier the same morning. Citigroup (C) and JP Morgan Chase (JPM) are set to release earnings the day before. The large banks have the potential to impact the broader market indices, including the S&P Index Futures and corresponding ETFs.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The value for this measure typically compares with consensus estimates. The analyst consensus estimate is $1.03 (range $0.95 to $1.09). (Source: Yahoo! Finance) Consensus was $1.05 three months ago.
  • Revenues: Analyst consensus expectations are for a 0.4% y/y increase to $22.42 bln (range $21.77 bln to $22.84 bln).
  • Wells Fargo Price/Earnings of 13.6 compares to the 5-year average 12.1; Price/Book of 1.5 compares to the 5-year average 1.5; Price/Revenue of 3.2 compares to the 5-year average 2.8. Dividend Yield of 2.8% compares to a 5-year average of 2.5%.
  • Analysts view Wells Fargo with 14 Buy, 12 Hold, and 4 Sell ratings. (source: MarketBeat.com)
  • Wells Fargo insiders sold 28,695 shares over the last three months and 8,084,287 shares in the past year. (source: NASDAQ.com) In June 2017, Wells Fargo approved an $11.5 bln share buyback, up from $8.3 bln the previous twelve months.
  • Wells Fargo shares have a 1-day average price change on earnings of 1.66%. Options are pricing in an implied move of 2.78% off earnings.

Recent News

  • 09/27: Wells Fargo received initial SEC approval to create exchange traded index funds (ETFs), according to a post on Reuters.com.
  • 09/21: Wells Fargo has agreed to pay another $2.8 million as refunds to customers for the additional 1.4 million unauthorized accounts. DBRS, a Toronto-based credit rating agency, downgraded Wells Fargo to AA (low) from AA citing higher-than-expected litigation costs that are leading to reduced profits, according to a post on Zack’s.com.
  • 09/20: The Fed will start winding down its controversial “quantitative easing” strategy under which it bought trillions of dollars in bonds, according to a post on MarketWatch.com.
  • 09/08: Oppenheimer thinks bank stocks are back to trading as bond proxies but sees the valuation of bank stocks, increased profitability, massive buyback authorizations, de-risked balance sheets and modest underlying loan growth outweighing negatives from North Korea, hurricanes and continued interest rate increases, according to a post on Barron’s.com.
  • 09/07: Wells Fargo & Co. bought $51 billion in servicing rights from, Seneca Mortgage Investments, an investment firm connected to Blackstone Group LP’s credit arm, according to a post on Bloomberg.com.
  • 08/31: Wells Fargo’s third-party review revealed that employees may have improperly opened as many as 3.5 million unauthorized accounts from January 2009 through September 2016 versus the bank’s previous estimate of 2.1 million accounts, according to a post on Fool.com.
  • 08/16: Wells Fargo & Co. replaced Chairman Stephen Sanger with a former Federal Reserve governor, Elizabeth “Betsy” Duke, according to a post on TheStreet.com.
  • 07/27: Wells Fargo charged more than 800,000 people who took out car loans for auto insurance they did not need. The expense of the unneeded insurance pushed roughly 274,000 Wells Fargo customers into delinquency, according to a post on NYTimes.com.

Technical Review

Wells Fargo stock reached an all-time high of $59.57 in early March that was over 60% above the 2007 high (only JPM is further above) but has underperformed other major banks the past two years. There’s quite a bit of consolidation between $45 and 55, so above $50 should keep the bulls in control. Somewhat of a worry this year is the declining lows. (Chart courtesy of StockCharts.com)

Summary

Wells Fargo revealed that another 1.4 million fake accounts were created by its employees illegally. It has agreed to pay another $2.8 million as refunds to customers. Unneeded auto insurance pushed roughly 274,000 Wells Fargo customers into delinquency on their car loans. While lacking integrity, such practices have helped push up the stock price much more than any other bank in the last 30 years and nobody is even close. Downside support is available given the increased stock buyback approval. Insider selling has pretty much dried up. The company has beaten and missed earnings consensus by an average of 4c the last four quarters.  Estimize consensus for an EPS of $1.05 on revenue of $22.255 bln compares to analyst consensus of $1.03 on revenue of $22.42 bln.

 

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