jclyak's  Instablog

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JD, CPA, 18 years CEO/CFO, investor for 50 years
  • A Romney Victory Might Equal Wells Fargo At $67 And Change By Early 2014? 0 comments
    Oct 20, 2012 11:32 AM | about stocks: WFC, JPM, BAC, C, USB

    I thought I'd put to pen my back-of-napkin thoughts of the impact of a Romney victory on Wells stock. Of course, the composition of Congress will have some effect on these thoughts, but by and large, the outcomes I articulate are conservative IMHO. I believe these effects will roll out before the end of 2013.

    Interest Rate Spread:

    The 10 year T-bond yield will return to 3%+ from the present 1.8% (which is already up 40 basis points from recent lows) The yield increase will occur by virtue of a less paternalistic Fed and a general improvement in the economy, etc.. The net effect would be a 50 basis point gain in Wells' NIM (Net Interest Margin)--This is $6.7 Billion/year pre-tax to Wells' bottom line.

    Regulatory Back-off:

    The Durbin amendment and some of the other costly, unnecessary and onerous provisions of Dodd-Frank will go away. Wells would save $2 Bil./year pre-tax.

    Economic Rebound:

    This is really a variable number and involves huge things like the economic impact of Obamacare repeal, but I believe dramatic loan growth and other activity will add a bundle to Wells income. Let's just throw in $2 Bil/year to the pre-tax run rate, a ridiculously low number

    Corporate Tax Reform:

    Romney has articulated a corporate tax rate reduction to a 25% top bracket from the current 35% rate.

    P/E Multiple Expansion:

    Wellls now has a Trailing 12 P/E of 10.8. Historically that number has been in the 15 range. Once all the bank-bashing diminishes and the regulatory-tax outlook stabilizes, there is no reason that historical P/E shouldn't return, especially with the 10-year treasuries at even 3%.

    Will the P/E return to 15 in 2013? No. However, I believe 13 P/E is attainable almost immediately after a favorable election outcome.

    Some Math:

    T-12 earnings were about $17 Bil. post tax yielding a pre-tax (@35%) earnings run rate is $26 Bil. for the last 12 months (current run rate, based on annualized 3Q is $29 Bil). Add up the above pre-tax 2013 benefits of a Romney win and the total is $10.7 Bil/year for a theoretical run rate of $36.7 Bil. in 2013 (might not instantly kick in though, so this is a bit hazy, however, this analysis also shorts Wells to the extent that the current run rate is much higher than the T-12 run rate). Apply a new tax rate of 25% and you end up with $27.5 Bil. of income after taxes, about $5.20/share.

    Put a multiple of 13 on $5.20 and Wells common trades at $67.60, by say 1Q 2014?

    Disclosure: I am long WFC.

    Stocks: WFC, JPM, BAC, C, USB
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