Tuesday, Wells Fargo & Company (NYSE:WFC) stock received an upgrade from Wolfe Research, moving from a Peer Perform to an Outperform rating. The firm also set a new price target for the bank's shares at $65.00. The adjustment arrives amid expectations of challenges in the rate-sensitive financial sector, yet Wells Fargo's current valuation is seen as incorporating these risks adequately.
Wells Fargo's stock is currently trading at less than 10 times Wolfe Research's estimated earnings per share (EPS) for 2026, which is more than a one-time turn discount compared to the target price-to-earnings (P/E) ratio.
This discount is considered the most significant among the bank and broker stocks covered by Wolfe Research, excluding LPL Financial (NASDAQ:LPLA) Holdings Inc.
The firm sees the potential for Wells Fargo's earnings to increase if the asset cap imposed by regulators is lifted, which could lead to approximately an 8% boost in EPS power.
Recent developments suggest that Wells Fargo is progressing towards meeting regulatory requirements, as indicated by the submission of a third-party review to the Federal Reserve.
Despite the Office of the Comptroller of the Currency's (OCC) enforcement actions raising concerns over delays in lifting the asset cap, Wolfe Research does not expect the cap to be removed until at least 2025. However, the firm believes that the potential benefits of the cap being lifted are not yet factored into consensus estimates or the bank's share price.
Wells Fargo's journey toward regulatory compliance and the anticipated removal of the asset cap are seen as positive steps that could result in an increase in the bank's normalized EPS to over $6.
The projection is based on the premise that the asset cap's removal will provide Wells Fargo with an opportunity to expand its assets and grow earnings accordingly. Wolfe Research's upgraded rating reflects a belief that the market has not fully appreciated this potential upside in the bank's stock valuation.
In other recent news, investors are eagerly anticipating the upcoming corporate earnings season, with high expectations that the results will support the current high valuations of U.S. stocks.
UBS equity strategists predict that S&P 500 earnings have risen by 4.7% in the third quarter compared to the same period last year. Major financial firms like JP Morgan Chase (NYSE:JPM), Wells Fargo, and BlackRock (NYSE:BLK) are scheduled to report earnings soon, providing crucial insights into the economy's health.
In parallel, OpenAI has secured a $4 billion credit facility backed by a consortium of banks, including JPMorgan Chase, Citi, and Wells Fargo. This significant financial resource will support the AI startup's continued growth and innovation in the artificial intelligence sector.
Wells Fargo has maintained its Buy rating from BofA Securities, following reports that regulators may be nearing the end of their review regarding the potential lifting of the bank's six-year-old asset cap.
Evercore ISI also maintained an Outperform rating on Wells Fargo shares, citing the bank's submission of a third-party review of its risk and control processes to the Federal Reserve as a positive step toward the potential lifting of the bank's asset cap.
In the banking sector, U.S. bank stocks have shown an uptick following the Federal Reserve's decision to slash interest rates by 50 basis points. This rate cut is anticipated to lower deposit costs for banks and ease the financial burden on borrowers, potentially reducing the risk of loan defaults.
These are the recent developments shaping the current state of the market and specific companies.
InvestingPro Insights
Recent InvestingPro data aligns with Wolfe Research's optimistic outlook on Wells Fargo. The bank's P/E ratio of 11.62 and adjusted P/E ratio of 10.15 for the last twelve months support the notion that WFC is trading at an attractive valuation. This is further emphasized by a low PEG ratio of 0.57, suggesting the stock may be undervalued relative to its earnings growth potential.
InvestingPro Tips highlight that management has been aggressively buying back shares, which could be seen as a vote of confidence in the company's future prospects. Additionally, Wells Fargo has maintained dividend payments for 54 consecutive years, demonstrating a strong commitment to shareholder returns. This is reflected in the current dividend yield of 2.8% and an impressive dividend growth of 33.33% over the last twelve months.
The bank's financial health appears robust, with a revenue of $78.23 billion over the last twelve months and an operating income margin of 30.4%. These figures, coupled with the fact that analysts predict the company will be profitable this year, reinforce Wolfe Research's positive stance on Wells Fargo's earnings potential.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 8 more InvestingPro Tips available for Wells Fargo, providing a deeper understanding of the company's financial position and market outlook.
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