Is Warren Buffett Right about Wells Fargo, Again?

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Is Warren Buffett Right about Wells Fargo, Again?

Wells Fargo & Company (NYSE:WFC) will be releasing first quarter earnings later on in April and it will finally answer some questions.  For instance, will Wells Fargo again prove that Warren Buffett is making the right decision by putting his money in America’s most profitable bank?

Right now, analysts predict that Wells Fargo could possibly take out JP Morgan (NYSE:JPM) as the most profitable bank in the US by the end of this year and further show that Warren Buffett knows what he is doing.  This is rather interesting considering all of the elaborate deals and trades that JP Morgan has been involved with in recent months; however Wells Fargo handled the financial crisis the best in my opinion.

The San Francisco based bank is expected to post huge results after a record fourth quarter earnings that trumped all its peers. The bank saw a 30% jump in earnings for 2011, which far exceeded the industry average of under 10% growth in earnings.

The consensus right now is that Wells Fargo is going to report $3.9 billion in first quarter profits on $20.3 billion in revenue, according to Bloomberg.  For the entire year, analysts are expecting the fourth largest bank to report a record $17.5 billion in profits on $81.3 billion in revenue.  If this became a reality, Wells Fargo would pass JP Morgan as the most profitable bank.  However, I wouldn’t be so quite as to discount JP Morgan.  They are a well run bank that can definitely find profiting opportunities in the marketplace.

Wells Fargo has good fundamentals to go along with its potential to be the most profitable bank.  Currently, the stock has an PE of 12 which is good if you look at its historical 5 year high and low of 42 and 9, respectively.  The company offers up a 2.59% dividend yield which is quite good for a bank.  Unfortunately, Wells Fargo has a debt load to deal with.  Total debt to equity comes in at 124 which is a hefty load for a bank to swallow but so far they have been able to maintain and still produce profits.  I would like to see that ratio come down a little but you have to realize that high debt is a trend in the banking industry right now.  Lastly, the bank sports a ROE of 12 which is good if you look at its 5 year average of 10 and the industry average of 5.  All in all, for a bank, Wells Fargo has some decent fundamentals but I would recommend doing your own research as this was just a quick overview of the fundamentals.

Warren Buffett has a 7.28% stake in Wells Fargo, which has been a great earner for the billionaire mostly because of its impressive growth numbers.  Within the past year, Wells Fargo is the only member of the “big four” that saw its share price rise, even after the banking sector has been a 20% jump from the rally so far this year.  Wells Fargo is up 7% while competitors JP Morgan, Bank of America and Citigroup are all still in the red.

Earlier this month, the Federal Reserve stress tested the banks to see if they would hold up in a recessionary environment.  Not only did Wells Fargo pass but they were cleared for buybacks and they raised their dividend 83%.

Wells Fargo is obviously one of the stronger banks that you should look at after a correction to get into.  Warren Buffett had it right and you can to but I would wait for this temporary slowdown to pass.


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