Wells Fargo (WFC) survived the financial crisis and emerged stronger than before. The company has proven to be a healthy bank that should intrigue all investors; however, just because a company looks good on its surface does not mean it automatically is a good investment. All companies must be analyzed on a fundamental level to determine whether the market's current price is fair. By using the ModernGraham analysis that we can determine which of those companies may have the least amount of risk going forward, and then compare the fundamental analysis of any other potential investment. What follows is how Wells Fargo fares in the ModernGraham valuation model.
Defensive and Enterprising Investor Tests:
Defensive Investor - must pass all 6 of the following tests: Score = 6/6
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary
Key Data:
| MG Value | $106.13 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $45.94 |
| Value Based on 0% Growth | $26.93 |
| Market Implied Growth Rate | 2.93% |
| PEmg | 14.36 |
| PB Ratio | 1.43 |
Balance Sheet - 9/30/2013
| Total Debt | $151,212,000,000 |
| Total Assets | $1,488,055,000,000 |
| Intangible Assets | $25,637,000,000 |
| Total Liabilities | $1,320,890,000,000 |
| Outstanding Shares | 5,273,740,000 |
Earnings Per Share
| 2013 | $3.89 |
| 2012 | $3.36 |
| 2011 | $2.82 |
| 2010 | $2.21 |
| 2009 | $1.75 |
| 2008 | $0.70 |
| 2007 | $2.38 |
| 2006 | $2.49 |
| 2005 | $2.25 |
| 2004 | $2.05 |
| 1999 | $1.83 |
Earnings Per Share - ModernGraham
| 2013 | $3.17 |
| 2012 | $2.59 |
| 2011 | $2.13 |
| 2010 | $1.83 |
| 2009 | $1.73 |
| 2008 | $1.80 |
Conclusion:
After looking at the fundamentals, Wells Fargo remains an extremely intriguing company that value investors seeking to follow Benjamin Graham's methods should be interested in researching further. The company passes all of the requirements for both the Defensive Investor and the Enterprising Investor. Investors should be eager to compare Wells Fargo to its competitors by reviewing the ModernGraham valuations of JP Morgan Chase (JPM) and Bank of America (BAC). From a valuation side of things, the company fares well after growing its EPSmg (normalized earnings) from $1.73 in 2009 to $3.17 for 2013. It is particularly noteworthy that the earnings are even greater now than they were just before the crisis, a time when banks were "booming". The market is currently implying a growth rate of 2.93%, but based on the historical performance of the company that growth rate should easily be beat. As a result, the company's intrinsic value appears much higher than the market price, and the company appears to be undervalued.
Disclaimer: The author did not hold a position in Wells Fargo Corp (WFC) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
PORTFOLIO
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