Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Most Undervalued Companies for the Defensive Investor – NovemberÂ 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Wells Fargo & Co (WFC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Wells Fargo & Company is a financial services and bank holding company. The Company’s segments are Community Banking, Wholesale Banking, and Wealth and Brokerage and Retirement. The Company’s Community Banking segment offers a range of financial products and services for consumers and small businesses, including checking and savings accounts, credit and debit cards, and auto, student and small business lending. The Community Banking segment’s products include investment, insurance and trust services, and mortgage and home equity loans. The Community Banking segment’s products and business segments include middle market commercial banking, government and institutional banking, corporate banking and commercial real estate, among others. The Company’s Wholesale Banking segment provides a range of financial solutions to businesses across the United States and around the world. The Wealth and Brokerage and Retirement segment provides a range of financial advisory services.
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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is aÂ free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
ModernGraham Valuation of WFC – December 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
|Defensive Investor; must pass all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$278,394,147,199||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Pass|
|3. Dividend Record||Dividend Payments for 10 years prior||Pass|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||117.48%||Pass|
|5. Moderate PEmg Ratio||PEmg < 20||13.78||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.43||Pass|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Pass|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||12.22%|
|MG Value based on 3% Growth||$56.08|
|MG Value based on 0% Growth||$32.87|
|Market Implied Growth Rate||2.64%|
|% of Intrinsic Value||41.85%|
Wells Fargo & CoÂ qualifies for bothÂ theÂ Enterprising Investor andÂ the more conservative Defensive Investor. Â The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods shouldÂ feel comfortable proceeding with further research.
As for a valuation,Â the company appears to be undervalued after growingÂ itsÂ EPSmg (normalized earnings) from $2.13 in 2011 to an estimated $3.87 for 2015. Â This level of demonstrated earnings growth outpacesÂ the market’s implied estimate of 2.64% annual earnings growth over the next 7-10 years.Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value aboveÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Wells Fargo & Co (WFC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||5|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep15|
|Shares Outstanding (Diluted Average)||5,193,800,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$4.08|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.87|
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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