$WFC Q4 Earnings Preview

by Enis January 9, 2013 2:26 pm • Commentary

Event:  WFC reports Q4 earnings Friday before the open.  The options market is implying about a 3% move post-earnings, which is above the 4 qtr avg move of about 2.5%, and below the 8 qtr avg move of about 4%.

Sentiment:  Wall Street analysts are somewhat bullish on the stock with 23 Buys, 17 Holds and 1 Sell, and an average 12 month price target of around $39.  Short interest has been low in the name for years, and sits at 0.6% of float.

Fundamentals / Valuation: WFC is the largest U.S. bank by market cap, at around $184 billion.  Its bread and butter over the years has been the residential mortgage market, as almost half of its balance sheet consists of loans tied either directly or indirectly to residential real estate (mostly mortgage and home equity loans).  

WFC is also a purely domestic bank, and most of its business is in retail and commercial banking, with a small investment banking business.  While the stock has benefited from the recent strength in U.S. housing as a result, I have been surprised that WFC has not rallied more as a result of that strength.  Part of the problem is that as rates have moved lower, refinancing of U.S. mortgages has been a burgeoning business for the large cap banks, but there is little juice left in that gravy train with rates already this low.  In addition, large cap banks have booked gains on their loan loss reserves for the past 3 years, leaving little additional benefit from that cookie jar going forward.  Finally, WFC already trades at a price-to-book of 1.3, not expensive, but not as cheap as some of the alternatives in the space.

Price Action / Technicals: The stock made new bull market highs on the QE3 announcement by the Fed in September, but has been a relative underperformer compared to other financials since then (many of which are at multiyear highs).  The 3 year chart shows a stock that has been rangebound, but now trying to resume the initial breakout above $34 from September:


Screen Shot 2013-01-09 at 1.30.19 PM

WFC 3 yr chart from Bloomberg

I don’t think the chart offers much insight here, except to illustrate obvious resistance in the $36 level, above which there is little psychological resistance.

Volatility:  Not a heck of alot going on in the options as far as implied vol goes. There’s a slight uptick into the earnings but nothing massive.

[caption id="attachment_21348" align="aligncenter" width="560"]Screen Shot 2013-01-09 at 12.15.51 PM 1 Yr HV vs IV from LiveVol Pro[/caption]

Jan options are in the high 20’s and should settle in the low 20’s following the report. February is already under 20 so won’t come in much.


My View:  Analysts don’t expect any fireworks from WFC in the Q4 report (and WFC usually comes in close to consensus estimates).  The important point on earnings will be 2013 guidance, where analysts are only projecting 7% earnings growth.  If WFC indicates expectations for 2013 loan growth as robust, along with good cost control, then the stock has a chance to make new highs tomorrow.  But more nuanced commentary likely results in more churning for what’s been a boring stock for a while now.

If we do any trades, we’ll be posting them tomorrow.