Wells Fargo & Company (WFC) is a diversified financial services company. The Company provides retail, commercial and corporate banking services through banking stores located in 39 states and the District of Columbia. It provides other financial services, through subsidiaries engaged in various businesses, principally wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment. The Company operates in three segments: Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement. As of December 31, 2009, the Company provided banking, insurance, investments, mortgage and consumer finance from more than 10,000 stores under various types of ownership and leasehold agreements.
Does WFC make for an intelligent investment or intelligent speculation today? Starting with a base estimate of annual estimated cash income at a value of approximately $8,500,000,000 and the number of shares outstanding at 5,210,000,000 shares; we used an assumed and estimated income annual growth of 8% for the first 10 years and assume zero growth from years 11 to 15. Review the estimated cash income record here.
The resulting rough estimated intrinsic value per share (discounted back to the present) is approximately $27.24.
- Market Price = $30.59
- Intrinsic Value = $27.24 (estimated)
- Debt/Equity Ratio = 2.12
- Price/Value (P/V) Ratio = 1.12
Before we make a purchase, we must decide (filter #1) if WFC is a high quality business with good economics. Does WFC have (filter #2) enduring competitive advantages, and does WFC have (filter #3) honest and able management.
- Current price/earnings ratio = 19.2
- Using a debt to equity ratio of 2.12, WFC shows a 5-year average return on equity = 12.7
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce cash income, and use debt wisely.
Does WFC make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is WFC the best place to invest our money today?
Time Forward Projection:
How will WFC compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.
In summary, using a debt to equity ratio of 2.12, WFC shows a 5-year average return on equity = 12.7 However, with a Market Price = $30.59 and an estimated Intrinsic Value = $27.24 (estimated), there does not appear to be a bargain at this time. The Debt/Equity ratio = 2.12 and based on a current purchase and holding and compounding period of 10 years, and a relative income growth of 8%, then the estimated effective annual yield on this investment may be greater than 6.9 %.
Disclosure: No positions
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