This week’s Friday Update includes our comments on earnings from Wells Fargo & Company (WFC). We had no price target or ratings changes this week, although we are reviewing Wells Fargo shares as they trade above our price target.
We are also reviewing shares of Baker Hughes (BKR) and Marathon Oil (MRO) as these also trade above our price targets.
We had some technical problems with the podcast today, so there won’t be a podcast accompanying this week’s note. We hope to have this resolved for next week.
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 strong quarter and provided some encouraging updates for 2022. Adjusted earnings of $1.25/share were 25% better than the $1.00 consensus and up 79% from a year ago. Profits were healthy across all four newly defined segments – Consumer banking (+37%), Commercial banking (+102%), Corporate/Investment banking (+64%) and Wealth Management (+11%).
Revenues grew in all four segments, with the largest contribution coming from Corporate/Investment banking, where strong debt origination and advisory fees showed impressive growth, offsetting flat trading revenues. Wealth Management fee revenues were 9% higher than a year ago, buoyed by rising stock prices. We had hoped that revenues in this segment would have been better, as the stock market gained 27% during the year, but for some undisclosed reason, assets and thus revenues, showed much less growth in the Wealth Management segment. But, overall, Wells Fargo’s core revenue growth was encouraging at +4% for the four segments. Corporate segment revenues grew 113%, but these include gains from private equity, venture capital and other less-stable sources, so we exclude them from our “core” analysis.
Net interest income fell slightly from a year ago but perked up 4% from the third quarter, boosted by incremental loan growth plus a modestly higher margin. Wells said its net interest income could be as much as 8% higher in 2022 due to loan growth and margin expansion.
A major source of improvement continues to be expense control. In the four core segments, expenses fell 3%, led by declines in personnel-related costs as well as occupancy and consulting costs. As the bank is cleaning up its operations, it is showing lower restructuring and other charges. Next year, Wells anticipates further benefits from its various efficiency initiatives, which should trim its expenses by $1.6 billion, or 3%, net of reinvestments. This is encouraging.
Credit quality remains strong, as write-offs were modest. Reserves are sturdy, but we think that Wells is probably finished trimming these, as the credit outlook is murky. Capital is healthy at a 11.4% CET1 ratio (down from 11.6% in the third quarter and a year ago), despite the bank repurchasing $14.5 billion of its shares and raising its dividend during the year (and repurchased $7 billion in the fourth quarter).
Headwinds include still-weak loan demand, uncertainty about the credit outlook, unclear timing on relief from the asset cap and other regulatory limits, and uncertainty about the interest rate environment.
WFC shares trade at 1.6x tangible book value. With all the numbers today across many banks, and the shares trading above our $55 price target, we are re-evaluating our rating for Wells Fargo shares.
Friday, January 14, 2022 Subscribers-Only Podcast (no podcast today):
Comments that would have been included in our podcast:
Walgreens – The CEO confirmed that the company is looking into strategic options for its U.K. Boots operations, as Walgreens refocuses on the United States. There is likely strong demand from private equity firms for the business.
General Electric – Bernstein Research initiates with Buy and $120 target. We have a lot of respect for Bernstein and their exceptionally rigorous research, and welcome their support.
Nokia provided encouraging guidance for 2022, indicating that its turnaround remains on track. The company said that it expected a comparable operating margin of 11% to 13.5% in 2022. It also said that its underlying businesses performed largely as expected in the fourth quarter. Nokia said that it expected that full-year 2021 earnings and comparable operating margins will be above its prior guidance and that net sales would be in line with its prior guide, even though this implied a fractional miss on 4Q revenues.
Positive news for Altria – An article in the New York Times said basically that “smoking is back,” especially among the young generation. The article cites anecdotal evidence backed up by statistics from the American Cancer Society and others. While no single factor seems to be behind the uptick, the pandemic and related stresses and social isolation, as well as smoking being a way to reconnect when in person, seem to be behind the trend. Another factor was a rebellion against the “health and wellness culture.” Curiously, new smokers seem to strongly dislike vaping as it delivers too much nicotine and that the risks of vaping are too unknown compared to the known risks of cigarettes. While it is hard to say how large or durable this trend is, it won’t hurt Altria.
Royal Dutch Shell – soon to be called just “Shell” – reached a deal to sell its Alabama oil refinery to Vertex Energy for about $150 million including inventory and other related assets. Vertex is a tiny, $300 million market-cap oil refining company based in Houston that uses alternative feedstock like used motor oils. Vertex (VTNR) is a bit too small for us, but worth a quick look. Shell is also offloading its stake in a Texas refinery to its partner Pemex for about $600 million. Following its $10 billion sale of Texas oil fields last year, and these deals, Shell is basically exiting the United States.
MolsonCoors is selling the St Archer Brewery in San Diego. Molson bought the business about seven years ago, but it didn’t work as well as hoped for. While not a large transaction, it suggests that management is willing to offload assets that aren’t pulling their weight – a valuable trait in any turnaround.
Ironwood Pharmaceuticals incrementally raised its 2021 revenue and adjusted EBITDA guidance, and guided for perhaps 1-2% sales growth and perhaps 8% EBITDA growth in 2022. While some investors continue to hope for faster revenue growth, we’re fine with almost anything that has a positive sign in front of it. Ironwood is a cash flow story not a growth story, although growth is certainly welcome. The company also said they repurchased 27 million shares in the fourth quarter – over 16% of total shares outstanding. Ironwood is becoming a cash flow machine, yet trades like it is evaporating.
Duluth Holdings announced strong holiday sales, up 6.4% compared to a year ago, and reaffirmed their fiscal 2021 outlook.
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. | Price on 1/13/2022 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 5.14 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 14.36 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 24.85 | 0.0% | Buy (44) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 22.82 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 5.84 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 49.59 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 69.04 | 1.4% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 23.93 | 4.2% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 11.36 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 15.02 | 2.9% | Buy (26) |
| Mid cap | Vistra Corporation | VST | Jun 2021 | 16.68 | 22.61 | 2.7% | Buy (25) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 32.90 | 3.4% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 18.57 | 1.3% | Buy (18) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 43.17 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 44.21 | 1.8% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 18.47 | 5.1% | Buy (57) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 59.82 | 0.0% | Buy (93) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 102.46 | 0.3% | Buy (160) |
| Large cap | Royal Dutch Shell plc | RDS.B | Jan 2015 | 69.95 | 49.26 | 3.9% | Buy (53) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.89 | 0.0% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 26.84 | 2.2% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 10.51 | 2.5% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 21.42 | 3.0% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 11.32 | 3.9% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 23.68 | 3.9% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 16.25 | 6.3% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 37.65 | 4.2% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 50.28 | 2.7% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 321.26 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 56.00 | 1.4% | Buy (55) |
| Large cap | Baker Hughes Company | BKR | Sep 2020 | 14.53 | 26.27 | 2.7% | Buy (26) |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 66.51 | 0.0% | Buy (78) |
| Large cap | Altria Group | MO | Mar 2021 | 43.80 | 50.31 | 7.2% | Buy (66) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 27.07 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 54.19 | 3.5% | Buy (70) |
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.
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.
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.