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The latest edition of Barron’s brings some compelling facts about financial bellwether Wells Fargo (NYSE: WFC) to light. The bank, a large cap stock, is an efficient operator whose conservative approach has helped it weather the subprime storm. The fact that Warren Buffett’s Berkshire Hathaway is the bank’s largest shareholder isn’t exactly bad news either.
Overview
Wells Fargo is one of the top ten largest banks with a market cap of almost $100 billion dollars (it is fifth largest by assets). Per Barron’s, it derives over a 1/3 of revenues from retail banking and lending via its community banking segment. Over 1/2 of revenues come from the firm’s mortgage / home equity lending (17%), investment / insurance (17%) and specialized lending (17%) businesses, with the balance derived from wholesale banking and consumer finance.
Opportunity
While Wells Fargo did suffer losses from home equity loans, it remained disciplined when it came to mortgage lending. In fact, its conservative lending practices prevented it from taking market share during the housing boom. Further, it is more adept at cross-selling products and services than other banks, and operates more efficiently than its peers.
Metrics
According to Barron’s, two key metrics come to the fore. First, WFC’s product cross-sell rate is twice that of other banks (an average of 5 additional products sold to every customer). In addition, its ratio of non-interest expense to revenue is the lowest among the top 5 banks at around 58%.
A quick look at ratios shows a below average trailing twelve month P/E of 12.5 vs. the industry average of 16.4, but its Q4 ‘07 price / book value of 2.0 is slightly higher than the industry average of 1.6. Its 5 year sales growth rate is 2 percentage points below industry average at 14%, but some of this may be attributable to its conservative lending approach. The highlight, though, is a 5 year average Return On Equity (ROE) of around 19% vs. the industry average of 16%. Finally, a dividend yield of 4% serves to sweeten the deal.
Risk
While WFC looks attractive on the surface, banks and the stock market have a rough road ahead. In addition, the company continues to have exposure to home equity loans (which can also suffer in a further deteriorating credit market). While the stock is 20% off its highs, it could certainly fall further with the rest of the banking industry.
Summary
All in all, Wells Fargo is a large cap with long term promise. The fact that Warren Buffett is a majority shareholder and has started increasing Berkshire Hathaway’s stake bodes well. However, investors should maintain a long term focus, as shares could continue to fall as the US treads further into a recession.
Tags: Financial, Large Cap Stocks, money center banks, Stock Investment Guide