As we discussed on the last post, WFC was expected to earn $.033 for the last quarter on $11.65 billion of revenue. Actually, they missed both numbers....badly. Instead, they recorded a LOSS of $.79 a share and revenue of $8.93 billion. They took billions of dollars of writedowns to account for future loan losses associated with the weak housing market as well as the acquisition of Wachovia.
So the stock was probably taken through the ringer, right? Wrong...actually, the stock was UP 30%! Why is that? Well, that's because as bad as the results were, they were the exact opposite of the results another seemingly strong bank (Bank of America) had earlier in the month. Let's break down the reasons why:
As mentioned in the article below, ""They are aggressively writing down risky assets in both the Wachovia and Wells Fargo portfolios, especially the toxic Pick-A-Pay loans that let the borrower determine how big or small the payment will be," Bart Narter, senior VP of Celent Banking Group," This aggressive strategy that management is taking is exactly why I bought this bank instead of the others and is what has kept them successful over the years.
- The dividend was not cut - like I mentioned earlier, there is an expectation that the dividend will get cut substantially to beef up capital reserves. They didn't do it this quarter. It doesn't mean they won't in the future, but the fact that they don't have to do it now does give a vote of confidence.
- Aggressive Loan Loss Reserves - WFC is accounting for huge future losses over the next few quarters. But they're accounting for them now...not later. Only a strong bank would be able to do this...the conservative management team that I had mentioned in my previous post is taking it's losses early so it can have good growth later.
- No Surprise Losses - The Wachovia intergration is going as planned, and there doesn't seem to be any hidden losses outside of what WFC was planning for. Unlike the Bank of America/Merrill Lynch deal, this one looks like it will be good for WFC in the long run.
The stock was up 30% today due to the not bad news. But I sitll think, long term, the company has a great deal of value to unlock. Deposits were up a record 31% last quarter - something I mentioned is key for banks when they are trying to grow. The expanded branch network gained from the Wachovia merger, along with weakness from competitors, is sure to help that deposite base grow even more. I'm holding on to this stock. It'll be a roller coaster, but I think it'll be a fun one!
What do you think? Is WFC a buy?
The full story can be found here:
http://www.thestreet.com/story/10460422/1/wells-fargo-takes-wachovia-losses-head-on.html
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
© 2009 Sahil Bhatia
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