Topic: Value Stocks

Value stocks: Focus on U.S. and GE Capital acquisition help Wells Fargo build profits

Procter & Gamble

Today, we look at a U.S. bank whose focus on the domestic market appears likely to pay off. Low interest rates have reduced Wells Fargo’s income and profit margins. But with 95% of its revenues coming from the U.S., Wells Fargo stands to benefit from a recovering American economy, and from the higher interest rates that are likely in 2016. In the meantime, the bank is cutting its costs. It’s also in the midst of acquiring the commercial lending and leasing businesses of GE Capital, which will give it another $32 billion in assets. We view Wells Fargo as a low-risk value stock for long-term, conservative investors.

Low interest rates are cutting the income Wells Fargo earns on new loans. At the same time, the bank has had to increase the rates they pay out to attract depositors, which has squeezed its margins.

In response, it is making acquisitions and cutting costs. These moves should fuel its earnings, particularly as interest rates will likely rise in 2016.

WELLS FARGO & CO. (New York symbol WFC; operates through three divisions: Community Banking provides mortgages, loans, credit cards and other financial services (57% of 2014 revenue, 59% of earnings); Wholesale Banking supplies business loans (27%, 32%); and Wealth, Brokerage and Retirement offers wealth management, brokerage and trust services to individuals and institutions, such as pension plans (16%, 9%).

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The bank gets 95% of its revenue from the U.S.

Wells Fargo recently agreed to buy the commercial lending and leasing operations of GE Capital, the financing division of General Electric. These businesses offer loans to help manufacturers boost their inventory, as well as other forms of financing.

The bank didn’t say how much it would pay, but these businesses have $32 billion in assets (mainly loans). Wells Fargo expects to close the deal in early 2016.

Value stocks: Despite risk of oil and gas loans, bad loans still low for Wells Fargo

Meanwhile, the bank earned $5.44 billion in the three months ended September 30, 2015, up 0.6% from $5.41 billion a year earlier. Per-share earnings rose 2.9%, to $1.05 from $1.02, on fewer shares outstanding. Revenue gained 3.1%, to $21.9 billion from $21.2 billion. Low interest rates continue to spur demand for mortgages, car loans and business loans. Wells Fargo set aside $703 million to cover future bad loans, up 91.0% from $368 million a year earlier.

That’s mainly because the bank did not take back funds it had previously set aside for loan losses, compared to the $300 million it took back a year earlier. Low oil prices are also increasing the risk on loans it made to oil and gas producers.

Even so, bad loans accounted for just 1.47% of the Wells Fargo’s total as of September 30, 2015, down from 1.93% from a year ago.

The bank will probably earn $4.16 a share in 2015, and the stock trades at 13.2 times that forecast. The $1.50 dividend yields 2.8%.

Recommendation in Wall Street Stock Forecaster: BUY

For a recent report on another often underrated value stock, read: Printer Transcontinental makes a good impression with its new acquisition.

For our advice on finding the best value stocks to invest in, read The 9 keys to finding undervalued stock picks.


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