This week we review earnings from Wells Fargo (WFC). Next week, we are expecting earnings reports from Holcim (HCMLY) and Xerox (XRX), with the quarterly earnings deluge starting the following week when 12 companies report.
Earnings updates:
Wells Fargo & Co. (WFC) – Wells Fargo is one of the nations’ 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 mixed quarter in terms of its progress toward our targets. Based on its current $35.13/share tangible book value, the stock trades at a 1.35x multiple, not cheap but not expensive compared to peers at closer to 2.0x – a level that WFC shares should approach once its turnaround is complete. On an earnings basis, the shares trade at about 11.8x this year’s expected earnings and about 9.3x next year’s expected earnings, which is below what it should trade at in a post-turnaround scenario.
In the quarter, earnings of $0.88/share fell 14% from a year ago but this was about 10% above the consensus estimate.
Net interest income (the profits from lending and borrowing) fell 5%. Higher interest rates helped boost lending margins, and loan balances rose, but these tailwinds were more than offset by lower PPP loan profits and other items. Fee income fell 14% from a year ago and 28% from the fourth quarter as mortgage banking, investment banking, trading, brokerage and other fees fell. Much of this fall-off in fee income was expected, as last year’s exceptionally strong environment wasn’t sustainable, but the decline weighed on year-over-year comparisons nonetheless.
Also, earnings fell compared to a year ago as the bank had strong one-time profits last year from the sale of its asset management and corporate trust operations.
Expenses fell 1% from a year ago, as the bank continues to increase its operating efficiency, yet remains burdened by high regulatory compliance and other costs.
Credit quality remains strong. Loan losses were among the lowest in years as net charge-offs were a miniscule 0.14% of loans (annualized). We use a rough benchmark of perhaps 0.50% as a more typical big-bank charge-off rate in normal times. Wells again reduced its reserves for bad loans, now at 1.39% of total loans, to a level that we would consider a prudent minimum, especially given reasonable risks that higher interest rates and a slowing economy will pressure future loan charge-offs.
The large share repurchase and the recurring dividend totaled $9.4 billion, far greater than its $3.7 billion of net income and other capital-affecting accounting events, so its capital fell to 10.5% from 11.8% a year ago. We think the bank is being a bit aggressive in its buybacks, particularly as its average buyback price of $54.50/share is noticeably higher than its current price. We’d rather the bank patiently wait for more opportunistic times to buy back its shares, rather than mechanically buy them back in an effort to make nifty-sounding headlines.
Friday, April 14, 2022, Subscribers-Only Podcast:
Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.
Today’s podcast is about 9½ minutes and covers:
- Earnings:
- Wells Fargo & Company (WFC) – Mixed first quarter report.
- Comments on other recommended companies:
- Toshiba (TOSYY) – will not pursue spin-off, but rather explore a sale.
- Walgreens Boots Alliance (WBA) – possible buyer for Boots U.K., and an overhang from the Florida opioid trial now underway.
- TreeHouse Foods (THS) – Activist investor Jana Partners puts one of its executives on the board.
- Elsewhere in the market
- What got the market to today may not be what produces investing success over the next 5-8 years.
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | 4/13/22 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 4.30 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 12.48 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 35.43 | 0.0% | Buy (44) |
| Small cap | ZimVie | ZIMV | Apr 2022 | 23.00 | 27.32 | 0.0% | Buy (32) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 22.32 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 5.70 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 33.96 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 67.32 | 1.5% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 19.29 | 5.2% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 12.28 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 10.99 | 4.4% | Buy (26) |
| Mid cap | Vistra Corporation | VST | Jun 2021 | 16.68 | 23.80 | 2.9% | Buy (25) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 34.98 | 3.2% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 26.57 | 1.1% | Buy (30) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 34.61 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 41.99 | 1.9% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 18.77 | 5.0% | Buy (25) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 55.16 | 0.0% | Buy (93) |
| Mid cap | Polaris | PII | Feb 2022 | 105.78 | 107.40 | 0.0% | Buy (160) |
| Mid cap | Goodyear Tire & Rubber | GT | Mar 2022 | 16.01 | 13.34 | 0.0% | Buy (24.50) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 90.75 | 0.4% | Buy (160) |
| Large cap | Shell plc | SHEL | Jan 2015 | 69.95 | 57.04 | 3.4% | Buy (60) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.25 | 1.7% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 25.82 | 2.4% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 7.64 | 3.4% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 19.80 | 3.2% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 9.07 | 4.9% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 22.46 | 4.1% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 17.56 | 5.8% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 42.00 | 3.8% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 54.29 | 2.8% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 346.22 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 48.54 | 1.6% | Buy (64) |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 47.86 | 0.0% | Buy (78) |
| Large cap | Altria Group | MO | Mar 2021 | 43.80 | 54.80 | 6.6% | Buy (66) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 26.26 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 44.60 | 4.3% | Buy (70) |
Please feel free to share your ideas and suggestions for the podcast 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 limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.Market cap is as-of the Initial Recommendation date. Current status indicates the rating and Price Target in ( ). Prices are closing prices as-of date indicated, except for those indicated by a "*", which are price as-of SELL recommendation date.
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.