Buying Opportunity for Warren Buffett's Favorite Banking Stock
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wall Street cares so much about earnings announcements, whether quarterly or annually. It places heavy emphasis on a company’s recent results and on whether they meet analysts’ expectations. During earnings announcements, share prices of many companies will be the most volatile. It is also when opportunities arise.
What happened?
Recently, Wells Fargo (NYSE: WFC), the bank that Warren Buffett loves the most, reported that the bank’s net income for the third quarter was $4.9 billion, up from $4.1 billion in the same period last year. Its Q3 diluted EPS was $0.88 per share, more than 22% from $0.72 in Q3 2011, and it was up 29% from the prior quarter.
The net charge-off and allowance were 1.21% and 2.27%, lower than the same quarter last year, of 1.37% and 2.68%, respectively. The bank has operated more efficiently over time, indicated by the lower efficiency ratio, from 59.5% in third quarter 2011 to 57.1% this quarter.
Why the stock price was down?
Although WFC experienced high growth in profits and more efficiency in its operations, its share price was down. For a week, its share price has decreased from $35.97 to $34.25, a loss of 5%. The downward movement of WFC’s share price was due to the fact that its revenue and net interest margin are below targets. Its revenue was $21.21 billion, lower than analysts’ consensus of $21.47 billion. The net interest margin came in at 3.66%, lower than the same period last year, of 3.84%, and lower than the prior quarter of 3.91%. The fall in net interest margin was caused by three reasons: (1) lower income from variable sources including fee income and purchased credit-impaired loan resolutions, (2) cash and short-term investments increased (due to $23 billion deposit growth) and (3) impact of lower rate environment. Compared to its peers including Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JP Morgan Chase (NYSE: JPM), its net interest margin is the highest even with the newly announced margin. Among those four, JPM got the lowest interest margin, 2.43%, whereas the margin of BAC and Citigroup were 2.21% and 2.8% respectively.
Valuation
Currently, WFC is trading at $34.25 per share; the total market capitalization is $181.17 billion. Current earnings result made TTM EPS $3.18. The company’s P/E ratio is nearly 10.8x. The P/B ratio is 1.26x.
|
Valuation |
P/E |
P/B |
|
WFC |
10.8 |
1.26 |
|
C |
9.47 |
0.55 |
|
BAC |
9.81 |
0.45 |
|
JPM |
8.86 |
0.86 |
Compared to its peers, WFC has the richest valuation. That is understandable, as WFC has demonstrated the best operating and profitability figures.
My Foolish take
The recent decrease in net interest margin is the overall industry environment. Even with the newly announced margin, WFC’s margin is still far higher than those of its peers. Even with the richest valuation among its peers, WFC deserves that. Moreover, S&P remains the rating for WFC because of its strong third quarter results. S&P said that WFC’s fundamental credit trends to be stable. The recent decrease in WFC’s stock price creates a buying opportunity for long-term investors, who would like to invest in Warren Buffet’s favorite banking stock.
Interested in Analysis?
To learn more about the most-talked-about bank out there, check out the Fool’s in-depth company report on Bank of America. The report details Bank of America’s prospects, including three reasons to buy and three reasons to sell. Just click here to get access.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
