With an average analyst rating of buy, Wells Fargo & is clearly an analyst favorite. But the analysts could be wrong. Is WFC overvalued at today's price of $79.52? Let's take a closer look at the fundamentals to find out.
Wells Fargo & has a P/E ratio of 13.7 based on its 12 month trailing earnings per share of $5.82. Considering its future earnings estimates of $5.49 per share, the stock's forward P/E ratio is 14.5. In comparison, the average P/E ratio of the Finance sector is 15.92 and the average P/E ratio of the S&P 500 is 29.3.
We can also compare the ratio of Wells Fargo &'s market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. WFC has a P/B ratio of 1.56, with any figure close to or below one indicating a potentially undervalued company.
The final element of our analysis will touch on Wells Fargo &'s ability to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Wells Fargo & has a free cash flow of $3.04 Billion, which it uses to pay its shareholders a 2.1% dividend.
At Market Inference, we will keep monitoring Wells Fargo & to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.
