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Wells Fargo shares sank after the bank reported worse-than-expected results this week, but they are rising on Wednesday after Evercore ISI upgraded the lender.
Analyst John Pancari raised his rating on Wells Fargo (WFC) to outperform In Line, saying the bad news has restored expectations. He raised his goal for the stock price by $ 1, to $ 27. The stock rose 4.1% to $ 25.24 in morning trading.
Management’s decision to cut the dividend and increase its reserves “helps clear the covers on capital and credit uncertainty, while pending spending actions bode well for profit power,” Pancari wrote.
Wells Fargo’s higher-than-expected cut in payout was undoubtedly a big part of the reasons shares fell on Tuesday. Pancari said, however, that investors should welcome the move because it means the administration is grappling with the painful steps it would have had to take at some point.
The “cut is prudent in light of ongoing macro uncertainty and earnings pressure linked to Covid and possible restructuring and regulatory charges,” the analyst wrote. The same is true of boosting your credit reserves, since the pandemic is likely to lead to loan losses.
Pancari also said he was encouraged by management’s comments on cost savings, as the actions Wells Fargo is taking now could cut spending over the next year.
“Fundamentals continue to be particularly pressured at WFC, but we are encouraged by the administration’s decisive actions on capital and credit, and an emerging commitment to address Wells’ lagging returns through cost efficiency,” he concluded. . “The battle is likely to be a long one and the headwinds on earnings will continue to be a persistent factor, but we believe the tide is turning Wells’ fundamentals.”
At the same time, the stock is becoming too cheap to ignore. With 53% shares this year, Wells Fargo is comfortably trading below 10 times expected earnings for next year.
Investor expectations for banks were low as the earnings season began, and Wells Fargo has been one of the group’s most troublesome names. If the company has really removed as much bad news as possible this quarter, that could bring support from other analysts, who have become more interested in the besieged stocks.
Write to Teresa Rivas at [email protected]
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