Wells Fargo's Near 30% Upside Tops US Bancorp

| About: Wells Fargo (WFC)
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Since I first expressed my belief that US Bancorp (NYSE:USB) would outperform Wells Fargo (NYSE:WFC) here, the firm gained 11.9%, beating its competitor by 1,467 basis points. Going forward, I now see greater upside in Wells Fargo. The Street currently prefers Wells Fargo with its "buy" rating.

From a multiples perspective, Wells Fargo is the cheaper of the two. It trades at a respective 10.9x and 8.5x past and forward earnings with a dividend yield of 1.6%. It is 30% more volatile than the broader market and US Bancorp. US Bancorp trades at a respective 11.9x and 10x past and forward earnings with a dividend yield of 1.7%.

At the fourth quarter earnings call, US Bancorp's CEO, Richard Davis, noted strong results amidst a challenging environment:

Our company achieved record net income for 2011, driven by record net revenue in the fourth quarter and for the full year. And we accomplished this during a very challenging and uncertain economic and regulatory environment…

U.S. Bank recorded record net income, driven by record total net revenue of $5.1 billion this quarter, which was 8.1% higher than the same quarter of 2010. Excluding the gain noted on the slide, the increase was 4.7%. Total net revenue was a record, even after excluding the $263 million gain, and was driven by growth in both net interest income and in fee revenue.

Total average loans and deposits grew year-over-year and we realized strong linked quarter total loan growth. Credit quality continued to improve.

The firm notably increased investments during the credit crisis - buying out trusts, several banks, and credit card portfolios, among other initiatives. By increasing scale, US Bancorp has well positioned itself for upside in the event of a full recovery. In the meanwhile, the wealth management and payment processing businesses help diversify revenue streams. Top-line from fees and reserved underwriting further offer greater safety than other financials. Regulatory challenges include a $300M annual headwind for debit card interchange and a $450M annual headwind for overdraft.

Consensus estimates for US Bancorp's EPS forecast that it will grow by 11.2% to $2.68 in 2012 and then by 9% and 11.6% in the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $2.85, the rough intrinsic value of the stock is $35.63, implying 22% upside.

Wells Fargo has even greater upside. Fourth quarter results were impressive, particularly in regards to the 7 bps expansion in NIM off of disappointing in 3Q. The firm penetrated credit card, mortgage, and noninterest bearing deposit markets. Funding costs fell as loans grew. Net interest income, fee revenues, and mortgage warehouse went up 3%, 7%, and 30% sequentially, respectively. Costs are anticipated to say relatively high this quarter. Management was fortunately able to deploy surplus capital to securities and HFS mortgages, which led to higher returns. Consequentially, investors may very well see buyback activity get more aggressive.

Consensus estimates for Wells Fargo's EPS forecast that it will grow by 13.8% to $3.21 in 2012 and then by 12.8% and 14.6% in the following two years. Assuming a multiple of 11x and a conservative 2013 EPS of $3.57, the rough intrinsic value of the stock is $39.27, implying 28.2% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.