Banks Stocks

Wells Fargo & Co Valuation – August 2017 $WFC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Wells Fargo & Co (WFC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Wells Fargo & Company is a bank holding company. The Company is a diversified financial services company. It has three operating segments: Community Banking, Wholesale Banking, and Wealth and Investment Management. The Company offers its services under three categories: personal, small business and commercial. It provides retail, commercial and corporate banking services through banking locations and offices, the Internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia and in other countries. It provides other financial services through its subsidiaries engaged in various businesses, including wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, computer and data processing services, investment advisory services, mortgage-backed securities servicing and venture capital investment.

WFC Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of WFC – August 2017

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 $257,827,293,159 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 159.23% Pass
5. Moderate PEmg Ratio PEmg < 20 12.93 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.27 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

EPSmg $4.02
MG Growth Estimate 4.02%
MG Value $66.46
Opinion Fairly Valued
MG Grade B+
MG Value based on 3% Growth $58.25
MG Value based on 0% Growth $34.15
Market Implied Growth Rate 2.21%
Current Price $51.94
% of Intrinsic Value 78.15%

Wells Fargo & Co qualifies for both the Defensive Investor and the Enterprising Investor.  In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $3.17 in 2013 to an estimated $4.02 for 2017.  This level of demonstrated earnings growth supports the market’s implied estimate of 2.21% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Wells Fargo & Co revealed the company was trading below its Graham Number of $55.83.  The company pays a dividend of $1.52 per share, for a yield of 2.9%, putting it among the best dividend paying stocks today.  Its PEmg (price over earnings per share – ModernGraham) was 12.93, which was below the industry average of 20.84, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Wells Fargo & Co performs fairly well in the ModernGraham grading system, scoring a B+.

Stage 3: Information for Further Research

Graham Number $55.83
PEmg 12.93
PB Ratio 1.27
Dividend Yield 2.92%
TTM Dividend $1.52
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Long-Term Debt & Capital Lease Obligation $238,869,000,000
Total Assets $1,930,871,000,000
Intangible Assets $40,761,000,000
Total Liabilities $1,725,641,000,000
Shares Outstanding (Diluted Average) 5,037,700,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.97
Dec2016 $3.99
Dec2015 $4.12
Dec2014 $4.10
Dec2013 $3.89
Dec2012 $3.36
Dec2011 $2.82
Dec2010 $2.21
Dec2009 $1.75
Dec2008 $0.70
Dec2007 $2.38
Dec2006 $2.47
Dec2005 $2.25
Dec2004 $2.05
Dec2003 $1.83
Dec2002 $1.58
Dec2001 $0.99
Dec2000 $1.16
Dec1999 $1.15
Dec1998 $0.59
Dec1997 $0.74

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.02
Dec2016 $3.99
Dec2015 $3.88
Dec2014 $3.60
Dec2013 $3.17
Dec2012 $2.59
Dec2011 $2.13
Dec2010 $1.83
Dec2009 $1.73
Dec2008 $1.80
Dec2007 $2.30
Dec2006 $2.18
Dec2005 $1.94
Dec2004 $1.69
Dec2003 $1.46
Dec2002 $1.21
Dec2001 $0.99

Recommended Reading:

Other ModernGraham posts about the company

10 Most Undervalued Companies for the Defensive Investor – May 2016
13 Best Stocks For Value Investors This Week – 12/12/15
Wells Fargo & Co Valuation – December 2015 Update $WFC
The Best Companies of the Banking Industry – October 2015
10 Most Undervalued Companies for the Defensive Investor – September 2015

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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