April 14, 2023

This week kicks off our earnings season, with Wells Fargo (WFC) reporting. There were no ratings changes this past week.

With the arrival of spring vacation week for our kids, we are on a lighter publication schedule, with brief Friday notes (to include earnings) and no podcast on Friday, April 14 and Friday, April 21. Also, the monthly letter will be pushed back a week to Wednesday, May 3. We’ll continue to monitor the holdings list and provide any alerts if necessary.

Earnings Updates:

Wells Fargo & Co. (WFC) – Wells Fargo is one of the nation’s largest banks. Under its previously weak leadership, the company never fully recovered from the 2009 financial crisis and its loose compliance culture led to a fake accounts scandal and other reputation-tarnishing problems. Also, like all banks, it is struggling with low interest rates and limited loan growth, although the much-feared pandemic-related loan losses no longer look likely. An additional constraint is a regulator-imposed cap on Wells Fargo’s asset size. Under new CEO Charles Scharf, the bank is aggressively restructuring its operations, cost structure and regulatory compliance.

Wells reported a strong quarter, with earnings of $1.23/share increasing 35% from a year ago and beating the consensus estimate by about 8%. Return on assets rose to 1.09% from 0.80% a year ago, while return on equity of 11.7% similarly showed an impressive improvement.

Capital strength increased, with the CET1 ratio rising to 10.8% compared to 10.5% a year ago and 10.6% in the prior quarter, even though the bank repurchased $4 billion in shares during the quarter. Deposits fell only 2% from the prior quarter and a very reasonable 7% from a year ago.

Non-interest expenses ticked down 1% from a year ago and 16% from the prior quarter, showing good cost discipline. The efficiency ratio, which compares non-interest expenses to total revenues, fell to 66% from 78% a year ago – while worse than JPMorgan (the quality benchmark) at 52%, Wells’ cost structure is clearly moving in the right direction. Charge-offs remain exceptionally low at 0.26% of loans, while Wells bolstered its loss reserves to 1.45% of loans ahead of likely higher credit losses.

Wells shares remain highly attractive as they trade at 1.1x tangible book value of $35.87 and offer a readily sustainable 3.1% dividend yield.

Comments on other recommended companies

• Bayer AG (BAYRY) – The leadership transition is underway but may take a while to begin making major changes. Bill Anderson has joined the management board and will officially start as CEO in June. Anderson is apparently taking a long-term approach to getting to know the company and its people before making big changes. While we would like to have the new chief wave a magic wand to restore Bayer’s value, we think this more rigorous approach has a much greater likelihood of producing higher value for longer.
• Korean chipmaker Samsung said it is cutting back production as it confronts evaporating profits. This is good news for Western Digital (WDC), helping lift its shares earlier this week.
• Walmart is suing Capital One (COF) in an effort to end its exclusive credit card relationship with the bank. Walmart says that Capital One violated the service level requirements of the contract, while Capital One said it will vigorously defend its contract and said that Walmart is trying to renegotiate or terminate a contract it signed just a few years ago, and adds that the service issues were immaterial and immediately cured. Walmart credit cards have about $8 billion in loan balances at Capital One – less than 3% of Capital One’s $300 billion in total loans.

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.