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Zachs Wells Fargo Company

Zachs Wells Fargo Company

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Published by: John Reed on Jan 02, 2011
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03/17/2011

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© 2010 Zacks Investment Research, All Rights reserved.
 
www.Zacks.com
111 North Canal Street, Chicago IL 60606
 
Wells Fargo & Company
 
(WFC-
NYSE)
 
SUMMARY
 
SUMMARY DATA
 
Risk Level *
 
Below Avg.,
 
Type of Stock
 
Large
-
Value
 
Industry
 
Banks
-
Major Reg
 
Zacks Industry Rank *
 
119 out of 291
 
Current
Recommendation
 
NEUTRAL
Prior Recommendation
 
N/A
 
Date of Last Change
 
04/07/2000
 
Current Price (07/14/10)
 
$27.66
 
Target Price
 
$29.00
 
Wells Fargo is scheduled to announce its secondquarter earnings on July 21. The companys firstquarter earnings came in significantly ahead of theZacks Consensus Estimate, aided by a higher-
than
-expected growth in revenues. Capital ratios
improved significantly in the quarter with the raising
of fresh equity. We think that the company is wellpositioned compared to its peers as the Wachovia
acquisition and the demise of some smaller players
 helped it garner a larger share in the mortgage
markets
. However, higher credit losses resultingfrom a continued deterioration in the housingmarkets and weak consumer trends will impactearnings in the upcoming quarters. We reiterate
our Neutral recommendation on the stock.
 
52
-
Week High
 
$33.88
 
52
-
Week Low
 
$22.87
 
One
-
Year Return (%)
 
14.08
 
Beta
1
.34
 
Average Daily Volume (sh)
 
38,010,888
 
 
Shares Outstanding (mil)
 
5,210
 
Market Capitalization ($mil)
 
$144,1
09
 
Short Interest Ratio (days)
 
1.26
 
Institutional Ownership (%)
 
71
 
Insider Ownership (%)
1
Annual Cash Dividend $0.20
 
Dividend Yield (%)
0.72
 5-
Yr. Historical Growth Rates
 
Sales (%)
 
18.8
 
Earnings Per Share (%)
-
15.5
 
Dividend (%)
-
30.4
 
P/E using TTM EPS
 
15.9
 
P/E using 2010 Estimate
 
13.9
 
P/E using 2011 Estimate
 
9.
4
Zacks Rank *: Short Term
 
1
3 months out
look
 
3
-
Hold
 
* Definition / Disclosure on last page
ZACKS CONSENSUSESTIMATES
Revenue Estimates
 
(I
n millions of $)
 
Q1
 
Q2
 
Q3
 
Q4
 
Year
 
(Mar)
 
(Jun)
 
(Sep)
 
(Dec)
 
(Dec)
 
2008
 
10,563 A
 
11,460 A
 
10,37
7
A
 
9,477 A
 
41
,
877 A
 
2009
 
21,017 A
 
22,507 A
 
22,466 A
 
22,696 A
8
8,6
8
6 A
 
2010
 
21,448 E
 
21,381 E
 
21,292 E
 
21,40
0
E
85,
521 E
 
2011
 
88
,426 E
 
Earnings
P
er Share Estimates
 
(EPS is operating earnings before non
-
recurring items, but including employeestock options expenses)
 
Q1
 
Q2
 
Q3
 
Q4
 
Year
 
(Mar)
 
(Jun)
 
(Sep)
 
(Dec)
 
(Dec)
 
2008
$0.60 A
 
$0.53 A
 
$0.49 A
-
$0.84 A
 
$0.7
8
A
 
2009
$0.59 A
 
$0.60 A
 
$0.56 A
 
$0.08 A
 
$1.8
3
A
 
2010
$0.50 A
 
$0.49 E
 
$0.5
2
E
 
$0.48 E
 
$1.9
9
E
 
2011
$2.94 E
 
P
rojected
EPS Growth
-
Next 5 Years %
 
10
 
July 15, 2010
 
 
Equity Research
 
WFC
|
Page
2
OVERVIEW
 
Wells Fargo & Company is one of the largest financial services company in the U.S. (in terms of assets)with $1.2 trillion in assets and over $800 million in deposits. The company provides retail and wholesalebanking, mortgage banking, consumer finance, equipment leasing, insurance brokerage, agricult
ural
finance, securities brokerage, trust, investment banking and other financial services through bankingstores, the internet and other distribution channels to individuals, businesses and institutions in all 50
states, the District of Columbia (D.C.) and in other countries.
 
The San Francisco
-
based company, as it stands today, is the result of the 1998 merger between Norwest
Corporation and the former Wells Fargo (founded in 1852), as well as the recent merger with WachoviaBank. Wells Fargo is also the premier institution in the U.S. in community banking, small businesslending, middle market commercial banking, agriculture lending, commercial real estate lending,
commercial real estate brokerage and bank
-
owned insurance brokerage.
 Wells Fargo acquired Wachovia Bank in December 2008, thereby being transformed into a premier
coast
-
to
-coast financial services franchise providing banking, insurance, investments, mortgage andconsumer finance through almost 10,000 stores, over 12,000 ATMs and 267,300 team members across
North America and other continents.
In December 2009, Wells Fargo exited the Troubled Asset Relief Program (TARP) after
a
full repaymentof its $25 billion loan along with cash dividends of $1.44 billion to the U.S. Treasury while maintainin
g
strong capital levels. The company had entered the TARP in October 2008. The company alsopurchased Prudential Financials non-controlling interest in securities brokerage joint venture,
assuringitself 100% of the future earnings.
 The company provides its services through three broad s
egments:
Community Banking (65% of 2009
revenue), Wholesale Banking (22%), and Wealth, Brokerage and Retirement (13%).
 
Community Banking
offers a complete line of diversified financial products and services for
consumers and small businesses including investment, insurance and trust services in 39 states and
D.C. It also offers mortgage and home equity loans in all 50 states and D.C. Wachovia has added
product offerings
as well as expanded channels to better serve customer
s.
The segment now
includes
the
Wells Fargo Financial division.
 
Wholesale Banking
provides financial solutions to businesses across the U.S. with annual salesgenerally over $10 million and to financial institutions globally. It provides middle market ban
king,
corporate banking, commercial real estate, treasury management, asset-based lending, insurance
brokerage, foreign exchange, correspondent banking, trade services, specialized lending, equipment
finance, corporate trust, investment banking, capital markets and asset management. Wachoviaexpanded product
offerings
across the segment, including investment banking, mergers andacquisitions, equity trading, equity structured products, fixed-income sales and trading and equity
and fixed income research.
 
We
alth, Brokerage and Retirement
provides a full range of financial advisory services to clients.
The
Wealth Management
division
provides affluent and high-
net
-worth clients with a complete rangeof wealth management solutions. Retail Brokerage divisions
fi
nancial advisors cater to thecustomers advisory, brokerage and financial needs as part of one of the largest full-
service
brokerage firms in the United States.
The Retirement division
provides retirement services forindividual investors and is a national leader in 401(k) and pension record
keeping.
The Wachovia
takeover
added the following businesses to this segment: Wachovia Securities (retail brokerage),
 
Equity Research
 
WFC
|
Page
3
Wachovia Wealth Management, including its family wealth business and Wachovias retirement and
reinsurance business.
 
Full Year 2009 Revenue(Business Segments)
Community
Banking
65%Wealth,
Brokerage
and
Retirement
13%
Wholesale
Banking
22%
Full Year 2009 Net income(Business Segments)
Community
Banking
64%Wealth,
Brokerage
and
Retirement
7%
Wholesale
Banking
29%
REASONS TO BUY
 
Wells Fargo has well justified reputation as a growth stock among the large-cap banks, with cross-selling as its key strength. Despite the ongoing weakness in housing, periodic dislocation in thesecondary mortgage capital markets and the overall challenging environment in the U.S., the
company has consistently achieved strong revenue growth in the past several quarters.
 Wells Fargo has a diverse geographic and business mix that enables it to sustain consistent
ea
rnings growth, while its strong consumer franchise allows it to offer a vast range of products to
households.
 Wells Fargos growth plans have
historically
included a large number of acquisitions, Wachovia
being the largest addition in December 2008. The company has demonstrated its ability to assimilate
local franchises offering a wider range of products than the acquired company could have had,
thus
increasing the number of options for customers to choose from. This has been
the
driving force
behind its growth in the recent years.
 The Wachovia merger is expected to generate an internal rate of return (IRR) of about 20% and beaccretive to earnings starting from the third year of its acquisition, without any adjustments. As aresult of the merger, Wells F
argo
has
substantially expanded its distribution network and has a
Community Banking presence for the first time in Alabama, Connecticut, Delaware, Florida, Georgia,
Kansas, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, SouthCarolina, Tennessee, Virginia and Washington D.C. During the first quarter of 2010, the companyconverted 20 Wachovia banking stores in Arizona, Nevada and Illinois to Wells Fargo. TheWachovia merger integration remained on track and is expected to realize $5 billion of annual
merger
-related savings upon completion of the integration process in 2011. The company has
achieved 70% of this targeted consolidated run
-
rate savings.
 Wells Fargos ongoing focus on producing high risk-adjusted returns helps it to maintain strongcapital ratios. Its absolute and relative liquidity position it above its peers to take advantage ofopportunities arising from the changing market environment. Moreover, the timely exit from TARPhas helped the company save the annual preferred stock dividend payment of $1.25 billion to the
government. This is expected to be slightly accretive to earnings in 2010.
 

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