Savings Experiment: Snow Removal
The Money Man Behind Rick Santorum: Who Is Foster S. Friess?Wells Fargo (NYSE: WFC) reported excellent first-quarter earnings this morning.
Earnings per share were $0.66 on revenue of $9.44 billion. Wall Street analysts had expected profit of $0.65. This marks the 17th time out of the past 20 quarters that Wells Fargo has reported double-digit earnings growth in percentage terms, a remarkable feat considering the size of Wells Fargo.
As analysts peel back the onion, Wells Fargo stated that subprime loans cost it about $90 million in revenue--not profits -- but revenue. That's about 1% of quarterly revenue. A senior portfolio manager I chatted with figured it cost Wells about one-third of a penny in earnings. In other words, it's not a big deal.
Management is carefully monitoring the loans charge -off which rose from 0.56% of loans up to 0.9% of loans. What cannot be ignored however is the underlying growth of the core deposits. Wells Fargo said core deposits rose a stunning 13% to over $290 billion this past quarter. It also noted strong growth in the commercial loan division.
Wells Fargo is the nation's 5th largest bank. With over 6,000 branches serving its customer base, Wells is also on a growth path. CEO Dick Kovacevich has been laser-beamed focused for the past decade on capturing new customers and selling them as many financial products as possible. His philosophy has always been simple: if a customer has 4-5 products from Wells Fargo, that customer is not going anywhere else!!
Wells certainly quieted some critics who thought it was going to implode over sub-prime defaults. Sure, there was a slight negative effect on Wells, but the key word there is "slight". Wells is among the largest issuers of mortgages in the United States and is geographically diverse within its mortgage portfolio.
Wells Fargo is not pushing any panic buttons and the company reaffirmed full year guidance for earnings per share at $2.72-2.74.
With the shares trading at a price earnings multiple of 12 times 2007 earnings and double-digit growth envisioned for 2007 and 2008, one could easily justify a PE multiple expansion for Wells Fargo.
Georges Yared is the CIO of Yared Investment Research.
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