KBW Upgrades Wells Fargo Despite Q2 Miss, Says Valuation 'Compelling'

Wells Fargo & Co (NYSE: WFC) underperformed in its July 13 second-quarter earnings report, but Keefe, Bruyette & Woods saw enough positive signals in the print to raise EPS estimates for the bank. 

The Analyst

Analyst Brian Kleinhanzl upgraded Wells Fargo from Market Perform to Outperform and raised the price target from $57 to $63.

The Thesis

Wells Fargo "has become an expense save and capital return story," Kleinhanzl said in the upgrade note.

If the bank executes on expenses and capital return, it should account for nearly 80 percent of EPS growth from 2018 to 2020, with higher revenue "mostly offset" by higher provision expense, the analyst said.

The bank's valuation is compelling, as KBW's projections show the stock returning to best-in-class among money center peers by 2020, Kleinhanzl said. 

Wells Fargo's regulatory and governance risks have decreased, as the most recent stress test and CCAR exams show the Fed is not prone to be punitive to the bank from an enforcement perspective, the analyst said. The analyst raised 2018, 2019 and 2020 EPS estimates from $4.50, $5.20 and $5.60 to $4.54, $5.35 and $5.90, respectively.

Lower noninterest expenses and lower provision expenses are the main drivers of KBW's higher EPS estimate, Kleinhanzl said. 

The Price Action

Wells Fargo shares were up about 1.68 percent at the time of publication Monday. 

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