2024-01-02 01:03:27 ET
Summary
- Wells Fargo Company's Q4 is likely to report strong but slightly declining interest income.
- This decline, however, is likely to be offset by operational discipline.
- I expect a double-beat as banks gear up for a slightly-lower interest rate environment in 2024.
- Wells Fargo stock's is trading above important moving day averages heading into earnings report.
Wells Fargo & Company ( WFC ) is set to report results for its Q4 and FY 2023, premarket on Friday, January 12th. Analysts expect the company to report Non-GAAP EPS of $1.15 on the back of $20.35 billion revenue. Should Wells Fargo meet the estimates, it'd represent a YoY EPS decline of nearly 20% and a 3.50% YoY jump in revenue.
My most recent coverage on Wells Fargo was after the company's dividend increase and buyback announcement, where I rated the stock a buy. Since then, Wells Fargo stock has returned 20% (including dividends) against the market's 8% return. With that background out of the way, let's now preview Wells Fargo's upcoming Q4 report on these parameters:
- Expectations heading into earnings
- Historical surprise
- Key things to look for
- Valuation
- Technical setup
WFC Q4 Preview (Seekingalpha.com)
Seesawing Expectations, With A Downward Blip
Expectations have been seesawing as we head into Q4 earnings report. Q4's EPS estimate has gone down from $1.32 at the beginning of the year to $1.12 in June to nudge up to $1.15 at present. It is also interesting to note that just two weeks ago, Q4 EPS estimate was at $1.24, meaning a nearly 10% decline in EPS expectations in 2 weeks. In addition, over the last 3 months, just 7/12 EPS revisions have been to the upside while 7/7 revenue revisions have been to the upside. This suggests there is a stronger belief in the company's revenue potential than profit potential, despite operational efficiencies covered below.
WFC Q4 Trend (Seekingalpha.com) WFC Q4 Revisions Count (Seekingalpha.com)
Beat or Miss? Recent Trend Is In Favor of Double Beat
Wells Fargo has beaten EPS estimates every single time in the last 12 quarters and revenue estimates 8 out of the last 12 quarters. Although 8/12 doesn't sound too promising on the revenue front, Wells Fargo has beaten revenue estimates in each of the three preceding quarters in 2023 and there is no reason to believe the streak would end in Q4. I expect Wells Fargo to beat on both top and bottom lines as explained below.
Key Things To Monitor
- Although interest rates are expected to slow down in 2024, it is still high enough for banks to profit off of their spreads. Wells Fargo handily beat both EPS and revenue expectations for all three quarters this year and I fully expect Q4's high interest rate environment to help the bank beat on both top and bottom lines. In specific, Q4 2022's interest income was $13.43 billion and will Wells Fargo show another YoY jump here? Macro environment suggests so but Wells Fargo was cautious and guided (page 8) for just $12.7 billion. Despite that, I'd be surprised to see anything less than $13 billion here.
- In addition, Wells Fargo has been operating within its limits as the bank reduced its non-interest expenses by more than 8% in Q3 on a YoY basis. I expect Wells Fargo to report well below $15 billion in non-interest expense in Q4 2023, as the company has guided for just $12.6 billion here (page 9). The savings here should easily make up for the slight YoY decline in interest expense that Wells Fargo has guided for.
- Although it maybe a bit early, it will be interesting to see whether there is an uptick in the company's Q4 loan portfolio with the Federal Reserve clearly signaling that it is done with raising interest rates.
Valuation
- Wells Fargo stock is heading into earnings at a forward multiple of 9.68 while expected to grow earnings at the rate of 6.67%/yr for the next 5 years. That gives the stock a reasonable Price-Earnings/Growth [PEG] ratio of 1.45.
- As a comparison, JPMorgan Chase & Co ( JPM ) is trading at a forward multiple of 10.22 while Bank of America Corporation ( BAC ) is trading at a 9.87.
- At $49, the stock is trading nearly 9% below its median price target of $53.50. Adding the near 3% yield, the expected one year return reaches 12%.
Overall, it is not a surprise to see Wells Fargo stock in the list of cyclical, large cap, value stocks heading into 2024.
Technical Indicators
From a technical perspective, Wells Fargo stock is heading into Q4 report and the new year with a strong base. The stock's Relative Strength Index [RSI] is a tiny bit overbought at 73 but has further room to go before getting excessively overbought. In addition, the stock is comfortably trading above both the 100- and 200-Day moving averages. Q4 report will be critical though, as a disappointing report or outlook may push the stock lower and the next long-term support (100-Day moving average) is a good 12% away.
WFC RSI (stockrsi.com) WFC Moving Avgs (barchart.com)
Conclusion
With interest rates almost certainly getting lower in 2024, it will be interesting to see how banks like Wells Fargo handle the year compared to the raging interest rate environment seen in the last two years. Bear in mind, this is also different from the Zero Interest Rate Policy [ZIRP] that banks were too used to before 2022. Naturally, I expect the demand for loans to inch up in 2024 but the profit margin (spread) is likely to get impacted. But I expect it to be net-positive for banks at the end of the day. Overall, Wells Fargo's Q4 report and guidance will be early indicators to how banks will perform in the slightly-lower interest rate environment. I retain by "Buy" rating on the stock as I expect a double-beat from the company on the back of reducing expenses and high-enough interest rates.
For further details see:
Wells Fargo's Fiscal Q4 Earnings Will Offer An Insight Into 2024