Wells Fargo & Corporation (WFC) is a leading financial services company with about $1.9 trillion in assets, serving one in every three U.S. families and more than 10% of small companies in the United States, and is a leading middle market banking provider in the United States. The company’s shares have gained 11% over the past month.
However, WFC's earnings and revenue fell far short of Wall Street expectations. WFC reported earnings per share of 74 cents, a 46% decline year over year. Its revenue came in at $17.03 billion, down from $20.27 billion in 2021. Analysts expected WFC to earn 83 cents per share on $17.5 billion in sales.
CEO Charlie Scharf said, "While our net income declined in the second quarter, our underlying results reflected our improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth." He further added high-interest rates and weaker financial markets caused VC, mortgage banking, and investment banking revenue to decline.
Also, the stock is down 9.8% year-to-date and 19.4% over the past six months to close its last trading session at $43.28.
Here's what could shape WFC's performance in the near term:
Mixed Financials
WFC's net interest income increased 15.9% year-over-year to $10.19 billion for the first quarter ended June 30, 2022. However, its total revenue decreased 15.9% from the year-ago value to $17.03 billion. The company’s net income declined 48.4% from the prior-year quarter to $3.11 billion, while its EPS decreased 46.4% year-over-year to $0.74.
Negative Profit Margins
WFC's trailing-12-month net income margin of 23% is 20.3% lower than the industry average of 28.9%. Also, its trailing-12-month ROA and ROE are negative 0.94% and 10%, respectively.
Mixed Valuation
In terms of forward non-GAAP P/E, the stock is currently trading at 10.73x, 7.4% higher than the industry average of 9.99x. However, its forward Price/Sales of 2.22x is 22.2% lower than the industry average of 2.85x. Also, WFC's forward Price/Book of 0.98x is 12.9% lower than the industry average of 1.13x.
Consensus Rating and Price Target Indicate Potential Upside
Each of the 13 Wall Street analysts that rated WFC, ten rated it Buy, and three rated it Hold. The 12-month median price target of $52.38 indicates a 21.03% potential upside. The price targets range from a low of $45.00 to a high of $62.00.
POWR Ratings Reflect Stable Prospects
WFC has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. WFC has a C grade for Quality and Value. The company’s mixed profitability is consistent with the Quality grade. In addition, its mixed valuations are in sync with the Value grade.
In the 11-stock, F-rated Money Center Banks industry, WFC is ranked #8.
Beyond what I've stated above, you can view WFC ratings for Growth, Stability, Sentiment, and Momentum here.
Bottom Line
As the U.S. economy recovers, the company expects significant improvement in all its business segments. However, WFC's weak financial results in the last quarter and negative profit margins have raised investors’ concerns over its prospects.
Furthermore, analysts expect its revenue and EPS to decline 6.7% and 16.8% year-over-year to $73.21 billion and $4.01 in the current year. So, we think investors should wait before scooping up its shares.
WFC shares fell $0.15 (-0.35%) in premarket trading Friday. Year-to-date, WFC has declined -8.90%, versus a -15.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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