On April 13th, Wells Fargo & Company (NYSE:WFC" href="https://www.google.com/finance?q=NYSE%3AWFC" target="_blank">NYSE:WFC) will be releasing earnings results for the first quarter of 2012. According to Reuters, analysts are bullish on Wells Fargo’s results with giving an “outperform” consensus. Analysts are expecting earnings to come in at $0.72 compared to Q1 2011 which came in at $0.73. However, analysts are expecting a yearly estimate of $3.19 compared to $2.81 last year. It is also important to note that analysts’ average target price for Wells Fargo is $36.52.
Analysts are bullish on bank earnings after the Federal Reserve’s stress test and capital requirements. However, just because a bank passed a stress test doesn’t mean they will beat earnings. In fact, the only three banks I see really beating estimates fully are JP Morgan, Wells Fargo and US Bancorp. To me, these are the three strongest banks in the US and if you plan on playing bank earnings I would consider these names, primarily.
It is interesting that this earnings season only industrial, financials and energy are expected to not have margins fall. A lot of investors and traders are very concerned with the prospect of falling margins, primarily profit margins.
This earnings season very well could put us into a correction. Investors are already preoccupied with the growing threat in Spain and terrible payroll numbers, if a significant number of companies report falling margins then we will have a correction. There is a lot of stress in the markets and lately, not a lot of relief.
Wells Fargo, on the other hand, has been cutting off bad debt and loans, while stepping up cash reserves. Wells Fargo didn’t have very many risky assets (compared to other banks) to begin with but it is good that they have been cleaning house of toxic assets.
As I said above, I expect JP Morgan, Wells Fargo and US Bancorp to beat earnings but it should be interesting to see how Bank of America reports. Bank of America has been showing signs of strength over the past few months showing us surprises such as surviving the Fed’s stress test. Unfortunately, BofA’s Countrywide stake could cost them a pretty penny. Investors want the bank to buy back Countrywide’s worthless loans that investors say were worthless from the beginning. Bank of America has already set aside $15 billion to repurchase faulty loans. This definitely could be a nightmare for Bank of America because they don’t have the money to repurchase bad loans right now. I would prefer them to focus on getting banking operations back to pre-recession levels but now they are going to be holding bad loans on their balance sheet which could come back to bite them.
This Friday, April 13th, the banking sector kicks off their earnings season with JP Morgan and Wells Fargo, two of my favorites. Look to see if earnings are as spectacular as analysts want them to be.