Thursday, March 25, 2010

Wells Fargo: Is Wall Street Underestimating Their Future Earnings?

Wells Fargo's (WFC) stock appears to be trying to break to a new high. Could this possibly mean that Wall Street is underestimating their earnings over the next couple of years? Recently I wrote a blog offering my thoughts on when the big banks would begin hiking dividends. In doing research on that blog, I stumbled across a presentation that Wells Fargo made at the Credit Lyonnais Asia Conference. Wells Fargo's presentation at the conference was one of the most upbeat presentations of a bank that I have heard in a long time. It wasn't a pep rally, but it left a clear picture of the strategy that the company is employing to return to solid earnings growth. In two words that strategy is cross-sell and market share expansion. WFC's culture has been wedded to the concept of cross-selling multiple products to their customers going all the way back to the old Norwest days. In the recent meeting, they said their average cross sell was now up to 5.95 products per customer. What was most interesting was their discussion of their Wachovia acquisition and the roll out of the WFC cross-selling program within Wachovia. It seems Wachovia's cross-sell average is about 4.6 products per customer. CEO John Stumpf, spent a lot of time discussing the opportunities of moving Wachovia's cross-sell average up to WFC's average. He said it would increase revenues on the Wachovia business by nearly 30%. And he wasn't just talking about the opportunity, he described WFC's ongoing program to accomplish this growth. Not surprisingly the growth plan had many moving parts primarily related to training and incenting employees to the WFC way. What was surprising was the number of new employees that were being added to former Wachovia branches. This was surprising because WFC is noted as a low expense-ratio bank and adding lots of new people in branches would seem to be counter to expense control in these difficult times. Stumpf made it clear that WFC was using these bad times to take market share. Listening to Mr. Stumpf, it was clear that they were being selective about what new business they went after, but it was equally clear that they were aggressively competing to expand their business footprint in every market in which they served. The final chapter on how the financial debacle of 2008-2009 will turn out has not been written. It may be years before loan losses can return to historical trends. Certainly, WFC has plenty of problem loans, but Mr. Stumpf convinced me that WFC had sufficient capital and reserves to handle their problems. One day the banking crisis will fade from the front pages and lending will not be seen as such a treacherous undertaking. When that day comes, my guess is WFC will have been the big winner in gaining market share in the United States. From the looks of the price graph above, there are many investors who believe Wells Fargo is on the right track. With any kind of luck, it will break to a new intermediate high, joining GE and further signaling that investors are trying to put the subprime crisis behind them. We own WFC. Please see Conditions of Use on the right side-bar.