Wells Fargo: Slightly Overvalued Despite Interest Rate Tailwinds

I am neutral on Wells Fargo (WFC) as it has a strong competitive position, Wall Street analysts are overwhelmingly bullish on it, and the average price target implies decent upside. However, the stock looks overvalued based on its historical average forward price-to-normalized-earnings ratio.

Wells Fargo & Company, also known as Wells Fargo, is a multinational financial services company based in the U.S. and was founded in 1929. While headquartered in San Francisco, California, WFC has operational headquarters in Manhattan, New York, and operates in over 35 countries around the world. As one of the largest banks in the U.S., it’s an important financial institution that provides a broad range of services.

Strengths

One of Wells Fargo’s biggest strengths is the bank’s diverse offerings. Its financial services are divided into different segments. These include Consumer Banking and Lending, Corporate & Investment Banking, Commercial Banking, and Wealth & Investment Management.

Additionally, it is a powerful financial institution since it’s one of the largest banks in the U.S. With $1.9 trillion in assets and serving one in every three households in the U.S., it is a powerhouse and is expected to continue to grow further

Recent Results

Wells Fargo’s recent results have been promising, with its total net income for 2021 coming to $21.5 billion. This bumped diluted share price up to $4.95 a share. The company’s Q4-2021 results have also shown an upward trend, with a net income of $5.75 billion.

Additionally, the non-interest income also saw a rise and increased by 27%. This was primarily due to the success of affiliate venture capital and private equity businesses. While net interest income decreased by 1%, this was attributed to lower yields on earning assets, amongst other factors. It should also be noted that non-interest expenses decreased by 11% due to increased efficiency.

Valuation Metrics

WFC stock looks overvalued here, as it trades above its historical forward price-to-normalized-earnings ratio. Its forward price-to-normalized-earnings ratio is 13.3 times compared to its historical average of 12.8 times. Moving forward, analysts expect normalized EPS to decline by 18.6% over the next 12 months.

Wall Street’s Take

Turning to Wall Street, WFC earns a Strong Buy consensus rating based on 15 Buys, four Holds, and zero Sell ratings assigned in the past three months. Additionally, the average Wells Fargo price target of $61.79 puts the upside potential at 17.2%.

Summary and Conclusions

WFC stock has a very strong and well-established competitive position in the banking and financial services sector. That said, its image has been tarnished in recent years due to some scandals as well as overall financial underperformance relative to peers.

While historically low interest rates have served as a severe headwind over the past decade, the outlook for interest rates indicates that they should soar higher in the coming years, which could boost the earnings power for the company.

Meanwhile, analysts are overwhelmingly bullish on the stock here, and the average price target implies decent upside could be in order. On the other hand, the forward price/normalized-earnings ratio indicates that the stock is overvalued relative to its history. As a result, investors might want to wait for a pullback in the stock price before adding shares.

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