Wells Fargo has delivered a powerful 3 year share price run, yet the real question for investors is whether that market performance lines up with the returns the bank is earning on its capital. With fresh headlines on regulation, capital allocation and new business lines, the issue is no longer just where the stock has been, but whether the current valuation can be backed by the economics of the franchise.
- Over the past 3 years Wells Fargo has returned about 115.7%, which puts real weight on the question of whether the underlying returns on equity and invested capital are strong enough to support that kind of move.
- At the same time the business faces a federal investigation into alleged discriminatory mortgage lending practices, which can affect how much capital needs to be set aside for legal risk and how regulators view the profitability of future housing finance activity.
- If you'd rather focus on earnings, this one's for you. See what Wells Fargo's 11.7x P/E says about the price.
The stock's next move may depend on whether the level and durability of the returns Wells Fargo earns on its capital are enough to justify where the share price sits today.
If you are testing whether Wells Fargo's 115.7% three year run is unusual for banks earning solid returns on capital, lining it up against 29 high quality undervalued stocks.
Is Wells Fargo a Bargain on Excess Returns?
The Excess Returns model looks at how much value Wells Fargo creates above the return investors demand on its equity. In this analysis, the bank is modeled with book value of $54.43 per share and a stable book value estimate of $61.69 per share, which points to a balance sheet expected to keep compounding rather than shrinking away. Stable EPS is set at $8.40 per share, with an average return on equity of 13.61% against a cost of equity of $5.40 per share, leaving about $3.00 per share of excess return in the model.
That spread between return on equity and equity cost is what allows the Excess Returns framework to place Wells Fargo's estimated intrinsic value substantially above the current share price of $83.55. Despite the federal investigation into alleged discriminatory mortgage lending practices introducing legal and regulatory uncertainty, the excess return assumptions in the model help explain why the stock is still priced below what its long run profitability could support. Find out what Wells Fargo could be worth using our Excess Returns estimate.
The Wells Fargo Narrative: What Would Justify Today's Price?
Narratives on Wells Fargo pick up where this valuation puzzle leaves off by spelling out which future paths for growth, margins and earnings would justify a meaningfully higher or lower share price than today. They sit on Simply Wall St's Community page. Rather than relying on a single multiple or model output, each scenario lays out its own set of assumptions so you can compare those inputs with Wells Fargo's actual financial results as they arrive over time.
One of the top community narratives on Wells Fargo: 17% undervalued
"The current valuation suggests the market may not be fully incorporating Wells Fargo’s recent return on tangible common equity levels..."
Discover why this Narrative puts Wells Fargo at 17% undervalued.
One more Wells Fargo check before you close the tab
Price and profitability only tell part of the Wells Fargo story, since independent checks have also raised specific cautions that investors may want to weigh before feeling comfortable with the overall picture. Take a closer look at 1 warning sign before settling on a valuation.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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