Calculated Partnerships And Operational Efficiency Propel Sustainable Revenue And Margin Growth

Key Takeaways

• Strategic investments and partnerships are expected to drive revenue growth and diversify Wells Fargo's income sources.
  
• Cost management and capital actions could enhance net margins and boost earnings per share growth.
  
• Economic uncertainty, regulatory challenges, and weak loan demand may impact revenue growth and net earnings due to increased provisions and compliance costs.

Catalysts

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

• Strategic investments that Wells Fargo is making in its businesses, such as the expansion of its credit card products and partnerships with companies like Expedia and Volkswagen, are expected to drive future revenue growth.
  
• Increased operational efficiencies and the ongoing decline in headcount, which has been consistently reducing expenses, could lead to an improvement in net margins as the bank continues its cost management efforts.
  
• The repositioning of the investment securities portfolio is projected to yield higher returns, potentially enhancing earnings over the next few years.
  
• Growth in fee-based revenue, which increased by 16% in the first nine months, is anticipated to provide more diverse and sustainable revenue sources, impacting overall revenue positively.
  
• Capital management actions, such as share buybacks and dividend increases, have been a focus, with substantial capital returned to shareholders. This is likely to continue to drive earnings per share (EPS) growth.

Wells Fargo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wells Fargo's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.8% today to 22.5% in 3 years time.
• Analysts expect earnings to reach $20.0 billion (and earnings per share of $6.48) by about October 2027, up from $17.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $17.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2027 earnings, up from 12.4x today. This future PE is greater than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 2.64% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Wells Fargo Future Earnings Per Share Growth

Risks

• Economic uncertainty and weak commercial loan demand may negatively impact revenue growth prospects, as businesses remain cautious with their capital expenditures and inventory investments.
  
• The office market remains weak, with expected additional charge-offs in the commercial real estate office portfolio. This could lead to increased provisions and affect net margins.
  
• Average loans have declined due to maintained strong credit standards and a focus on returns over volume, potentially limiting revenue from interest income.
  
• Consumer segments with lower deposit and asset levels are experiencing stress due to inflation, which may affect future consumer spending and, subsequently, revenue growth.
  
• Regulatory challenges, such as recent agreements with the Office of the Comptroller of the Currency, could result in increased compliance costs and litigation expenses, affecting net earnings.

Valuation

• The analysts have a consensus price target of $66.02 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 $75.0, and the most bearish reporting a price target of just $58.92.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $88.7 billion, earnings will come to $20.0 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $63.03, the analyst's price target of $66.02 is 4.5% 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.