Wells Fargo (NYSE:WFC) is the nation's largest home lender with operations worldwide. Since gobbling up Wachovia Bank in 2008, it's the fourth largest bank in the U.S. and the largest by far in terms of its market cap.
Wells Fargo has traded slow and steady for investors over the last twelve months, but has yielded its stockholders 16.1% returns. Also, stockholders are in good company, as the Oracle himself recently increased his stake in the company.
Friday morning, Wells Fargo reported its earnings before the market opened. For the 10th quarter in a row, Wells Fargo posted a new record in profits. The NY Times reported:
Bolstered in part by the improved quality of its loans and a $900 million release in its reserves, the bank's net income rose to $5.6 billion, or 99 cents a share. That outdid the $4.9 billion, or 88 cents a share, Wells Fargo earned in the third quarter of 2012, making it the 15th consecutive rise in quarterly profits for the bank. The report exceeded the earnings expectations of 97 cents a share among analysts polled by Thomson Reuters.
Net income for the lender was $5.6 billion, up from $4.9 billion in the same quarter of 2012. EPS beat analysts' expectations of $0.97 by 2 cents a share.
The company lagged where it knew that it would, in the area of higher interest rates effecting lending and the housing market. I remember clearly Wells Fargo's quarterly last quarter. The company, like JPMorgan (NYSE:JPM) last quarter, stated they were preparing for a decline in mortgage activity due to interest rates.
"As our economy continues to transition to higher interest rates, our
diversified business model and strong risk discipline contributed to record earnings per share,'' CEO John Stumpf said in a statement. "The improvement in the housing market has been beneficial to our customers and significantly contributed to our broad-based credit improvement in the quarter."
Important was that they were able to act in a dynamic fashion and still deliver a third quarter profit that was up 13%. And, they're doing it the same way that Bank of America (NYSE:BAC) is doing it - reducing expenses.
Layoffs and cost reduction are not the easiest way to get things running smoothly, but in Well Fargo's case like Bank of America, where revenue growth isn't explosive, it's extremely effective in helping out the bottom line - and subsequently, building value for the company's shareholders. There's two ways to increase profits, it's business 101 - lowering cost or raising revenue. As long as the net profit at the end of the day is up, it's not a major concern as to how it takes place - through one, another, or a combination of the two. In this case, the company remains fundamentally sound and with plenty of cash.
It's necessary to remember that in a situation like WFC is in (and BAC), that if cuts aren't made, the company usually winds up making shareholders pay for it by doing things like financing and lowering dividends. So, cuts can be the shareholder-friendly option - even if it's sad to see layoffs and closings.
The market doesn't seem to agree. Wells Fargo traded up during pre-market Friday morning, but quickly pulled back when the market opened up. Currently, its trading off about 1.6% at $40.80.
There's a couple of reasons why I see this momentary pullback as a buying opportunity.
The first is that the issue of mortgage pullbacks and interest rates is a sector-wide issue. In other words, it's not a problem that WFC is going to have any more than other home lenders like BAC and J.P. Morgan . As the housing market continues to correct, banks should gain some traction here and be able to monetize it.
The New York Times reported on September 26th that the housing market recovery still seems to be on track:
For now, though, builders are building, sellers are selling and mortgage lenders are less nervous about extending credit to buyers.
The heady price increases in the first half of the year slowed a bit in July, according to data released on Tuesday.
But in the face of pent-up demand and emboldened consumers, home values were still heading upward at a healthy pace, rising 12.4 percent from July 2012 to July 2013, according to the Standard & Poor's Case/Shiller home price index, which tracks sales in 20 cities.
A separate index of mortgages backed by Fannie Mae and Freddie Mac showed an 8.8 percent gain in prices over the same time period.
Two national homebuilders, Lennar and KB Home, reported significant revenue growth and profits in the third quarter. Lennar said its third-quarter earnings rose 39 percent over the third quarter of last year, and KB said its profit had increased sevenfold.
Secondly, the fact that Warren Buffet has staked an enormous amount of his portfolio in the company is really all we should need to know about the potential quality of an investment in Wells Fargo.
Buffett having a large stake in the company was reason enough for me to endorse Bank of America a couple of weeks ago:
The attention that the company has been paying to aligning the fundamentals of the company have clearly continued to impress Warren Buffett, who still holds a profitable position on paper to the tune of $5B. In addition to Buffett, I remain impressed with the focus and execution that BAC has put into its cost cutting and fundamental management.
Wells Fargo is similar to Bank of America in the sense that it has a simple business plan, reputable management and good fundamentals.
In addition, Wells Fargo has recently upped their dividends several times, paying 600% more than they had been paying in early 2011. If the trend continues, they're likely to continue to raise dividends commensurate with business growth.
Here's how average dividends have fared each year, dating back to 2007:
To compound an argument for going long on banks in general right now, let's not forget about the recent nomination of Janet Yellen to be the next head of the Federal Reserve.
Yellen has publicly stated numerous times that she's in no hurry to reverse government stimulus. This gives immense comfort to current investors today, while possibly screwing future generations and definitely giving Ron Paul a potential cardiac arrest.
She's what you would call, a bank-friendly, Keynesian choice. The rich will continue to get richer - and you will, too - if you bet the "too big to fail" banks where they keep their money.
I'm strong on the sentiment that this pullback from earnings has created an attractive chance to enter a long position in Wells Fargo. As always, I wish all investors the best of luck.