Partnerships With Volkswagen And Audi And Technology Investments Will Improve Future Profitability

Key Takeaways

• Repositioning the home lending business and embracing fee-based revenue growth aim to enhance profitability and revenue stability.
  
• New credit card products and partnerships in auto finance anticipate revenue growth and improved net margins.
  
• Dependence on interest rate changes and weak loan demand, alongside risk control costs, may pressure Wells Fargo's revenue and margin growth.

Catalysts

A financial services company, provides diversified banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally.

• The repositioning of the home lending business, including a significant reduction in headcount and third-party mortgage loans, should lead to improved profitability in this segment. This is likely to enhance earnings in the future as the business becomes more streamlined and efficient.
  
• The strategic shift to emphasize and grow fee-based revenue, which increased by 15% in 2024, reduces reliance on net interest income and should positively impact both revenue stability and net margins moving forward.
  
• The launch of new credit card products and the significant growth in new credit card accounts suggest potential for increased revenue and improved net margins from card fees and interest income as these accounts mature and achieve full profitability.
  
• The partnership with Volkswagen and Audi to be the preferred purchase finance provider in the U.S. is expected to drive future revenue growth in the auto finance business, which should positively impact earnings over time.
  
• Investments in technology and digital platforms, including enhancements to mobile banking and customer relationship management, are expected to improve operational efficiency and customer engagement, potentially resulting in higher net margins through increased efficiency and customer retention.

Wells Fargo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wells Fargo's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.9% today to 25.3% in 3 years time.
• Analysts expect earnings to reach $23.2 billion (and earnings per share of $7.5) by about January 2028, up from $18.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 13.8x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Wells Fargo Future Earnings Per Share Growth

Risks

• The ongoing reliance on interest rate changes could be a risk if anticipated Federal Reserve rate cuts do not occur, potentially impacting Wells Fargo's net interest income projections for 2025.
  
• Challenges remain in sustaining loan growth amidst weak loan demand in areas such as home lending and commercial real estate, as well as credit tightening actions, which could impact revenue growth targets.
  
• Ongoing client caution and potential further declines in categories like asset-backed lending could hinder broader loan growth, potentially affecting future revenue streams.
  
• Commercial real estate, especially the office portfolio, continues to have weaker fundamentals, posing a risk to credit quality and net charge-offs, which could impact net margins if losses increase.
  
• The need for continued and significant investment in risk control and compliance infrastructure could limit expense reduction opportunities, potentially pressuring net margins if rapid revenue growth does not occur to offset this.

Valuation

• The analysts have a consensus price target of $82.52 for Wells Fargo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $92.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $91.8 billion, earnings will come to $23.2 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $77.88, the analyst's price target of $82.52 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.