Bailey Pemberton
4 min read
Wells Fargo has delivered a powerful 3 year share price recovery, yet the live question for anyone looking at the stock today is whether that move is supported by the returns the bank earns on its capital. With the Excess Returns intrinsic value framework focused squarely on profitability relative to the capital employed, the key issue is how that track record lines up with the current market tag.
-
Over the past 3 years the stock has returned 120.8%, which now puts real weight on whether Wells Fargo’s returns on capital can justify the higher expectations baked into that performance.
-
Recent commentary from senior executives about expanding corporate and investment banking and leading large loan originations, including in New York real estate, can influence how efficiently the bank deploys its balance sheet and the rate of return it earns on each extra dollar of capital.
-
If you’d rather focus on earnings, this one’s for you. See what Wells Fargo’s 11.5x P/E says about the price.
The stock’s next move may depend on whether Wells Fargo’s current share price is adequately supported by the returns it earns on its capital relative to the intrinsic value suggested by the Excess Returns model.
If you are weighing Wells Fargo against other banks on how effectively they turn balance sheet heft into returns, a useful reference point is a curated list of solid balance sheet and fundamentals stocks screener (25 results).
Is Wells Fargo a Bargain on Excess Returns?
The Excess Returns model looks at how effectively Wells Fargo turns each dollar of shareholder equity into earnings above its own funding cost. On this view, the bank is working with a Book Value of $52.86 per share and a Stable Book Value estimate of $59.75 per share, while analysts see Stable EPS around $8.44 per share based on future Return on Equity assumptions.
An implied Average Return on Equity of 14.13% against a Cost of Equity of $4.83 per share leaves an estimated Excess Return of $3.61 per share. This suggests the model expects Wells Fargo to earn more on its capital base than investors are charging it for that capital. Because of Wells Fargo leading large New York loan originations and expanding corporate and investment banking, the market may already be including some of this efficiency in the current share price of $83.94, even though the Excess Returns projections put Wells Fargo’s estimated intrinsic value substantially above the current share price. Find out what Wells Fargo could be worth using our Excess Returns estimate.
