WFC reported earnings, and they were a mess. The fake-accounts scandal refuses to go away. They have unsuccessfully tried to clean up their act for 3+ years now.
Without a doubt the scandal has been bad for the bank. But it may have been a blessing in disguise for me. I have been building a position, since the scandal first broke out. Currently, WFC is my third largest position (after FB and BRKB) with an effective cost basis around $43. I am looking to add.
The downside, in my opinion, is well-protected. Almost everything that could go wrong in the past three years, has gone wrong. Low interest rates, check. A steady stream of other scandals, check. Regulator ire, check. Bad media, check. Leadership vacuum (for a long time), check.
So what’s the good news?
The stream of negative hits has been incessant. If a few of these factors turn, the narrative and the stock price will improve.
Despite the bad news and depressed earnings, WFC trades for a PE of less than 10. It is cheap. The juicy 4% dividend provides downside support. The new CEO looks capable and focused on the right things. His incentives are lined to make the latest quarter a kitchen-sink quarter.
Over the next 5 years, WFC will generate about 40-50% of its market cap in FCF. With their capitalization levels, and buyback policy they could retire a significant fraction of their shares. They already ate up 10+% of their shares last year. Part of me hopes the stock price languishes, so that the buyback can be carried out at attractive prices.
In 5 years, one can conservatively see an EPS of ~$7. At 12x EPS, shares could trade around $85. With the 4% dividend, a mid-teens return seems reasonable to expect, even without too many positive surprises. If litigation expenses subside, their profitability will improve further. If interest rates rise, earnings will increase. If the eyes of the media and regulators moves elsewhere, WFC will thrive. In that scenario, IRR might increase from ~15% to ~25%.
Compared with the rest of this “bubbly” market, this seems like a classic, “heads I win, tails I don’t lose too much.”
Here are links to two great writeups on WFC.