Banking company Wells Fargo & is taking Wall Street by surprise today, falling to $54.0 and marking a -5.0% change compared to the S&P 500, which moved -2.0%. WFC is -15.84% below its average analyst target price of $64.16, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Wells Fargo & shares have outstripped the S&P 500 by 10.1%, with a price change of 30.7%.
Wells Fargo & Company, a financial services company, provides diversified banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Wells Fargo &'s trailing 12 month P/E ratio is 11.1, based on its trailing EPS of $4.88. The company has a forward P/E ratio of 9.8 according to its forward EPS of $5.5 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 19.48, and the S&P 500 has an average of 28.21. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
Wells Fargo &'s PEG ratio of 1.26 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Wells Fargo &'s free cash flow, which was $40.36 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $18.08 Billion and they've been growing at an average rate of 9.8%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in WFC have received an annualized dividend yield of 2.5% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Wells fargo &'s P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.15, but is still below the average P/B ratio of the Finance sector, which stood at 1.85 as of the second quarter of 2024.
Since it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend, Wells Fargo & is likely undervalued at today's prices. The company has poor growth indicators because of an inflated PEG ratio and decent net margins with a stable trend. We hope you enjoyed this overview of WFC's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
