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Wells Fargo (DOC download) by jennyyingdi


									Ticker: WFC
Sector: Financial                                       Wells Fargo
Industry: Money Center           Company Profile
                                 Wells Fargo and Company is a 482B financial services company
Recommendation: HOLD             that was founded in 1929 in San Francisco, CA. Its headquarters
                                 remains in San Francisco but the company has 6,200 branches
                                 located throughout the United States and Internationally. Wells
Pricing: (as of 7/6/07)          Fargo, as it is more commonly known, engages in banking,
                                 insurance, investments, mortgage banking, and consumer
Closing Price: $35.34
                                 finance. The company is divided into three major segments:
52-wk high     $36.99            Community Banking, Wholesale Banking, and Wells Fargo
52 –wk low     $33.01
                                 The Community Banking division offers numerous types of
                                 products. Their loan products include equity lines, equipment
Market Data:                     and transportation, education, home mortgage, and credit cards
                                 loans. Deposit options include checking accounts, savings
Market Cap: $117.99B
                                 deposits, individual retirement accounts, and time deposits. They
Total Assets: $912,495M          also offer numerous other small niche type loans to their
Trading vol:   11,592,000
                                 The Wholesale Banking segment provides commercial,
                                 corporate, and real estate banking products and services. Their
Valuation:                       product list is extensive and well diversified to satisfy all clients
EPS (ttm):     2.55              needs.

P/E (ttm):     13.85             The Wells Fargo Financial segment offers consumer and real
                                 estate loans to individuals. Clients are obtained through the
                                 purchase of sales finance contracts, “paper”, from retail
Profitability & Effectiveness    merchants and automobile dealers. The “paper” is a secured
(ttm):                           loan backed by the collateral of the contract. The financial
                                 division is also an active player in the credit card market.
ROA(yr):       1.78%
                                 Wells Fargo and Company is the only United States bank to
ROE(yr):       19.77%
                                 receive the highest possible credit rating from Moody’s Investor
Profit Margin(ttm):     25.55%   Services (Aaa). They are also currently ranked 17th in profit by
                                 Fortune 500
Oper Margin(ttm):       56.10%

Dane Barker             901313
1. WFC and its Market


          a. Provides banking and financial products and services in the United States
                 i. Operates in three segments:
                        1. Community Banking
                                offers a suite of deposit products, such as checking
                                   accounts, savings deposits, market rate accounts, individual
                                   retirement accounts, time deposits, and debit cards. This
                                   segment's loan portfolio includes lines of credit; equity
                                   lines and loans; equipment and transportation loans,
                                   including recreational vehicle and marine; education loans;
                                   origination and purchase of residential mortgage loans;
                                   servicing of mortgage loans; and credit cards. It also
                                   provides receivables and inventory financing, equipment
                                   leases, real estate financing, small business administration
                                   financing, venture capital financing, cash management,
                                   payroll services, retirement plans, health savings accounts,
                                   and credit and debit card processing services.

                        2. Wholesale Banking
                              provides commercial, corporate, and real estate banking
                                 products and services in the United States. Its products
                                 include traditional commercial loans and lines of credit,
                                 letters of credit, asset-based lending, equipment leasing,
                                 mezzanine financing, high-yield debt, international trade
                                 facilities, foreign exchange services, treasury management,
                                 investment management, institutional fixed income and
                                 equity sales, interest rate, commodity and equity risk
                                 management, online/electronic products, insurance, and
                                 investment banking services.

                        3. Wells Fargo Financial Segment
                              The Wells Fargo Financial segment comprises consumer
                                  finance and auto finance operations. It also provides credit
                                  cards and lease, and other commercial financing services.
                 Pretax revenue earned by each segment during 2006
          Community         Wholesome Banking          Wells Fargo Financial

            $5,531M                 $2,086M                        $865M

2. The Competitive Environment
                 a. Three main direct competitors
                       1. Bank of America: Bank of America Corporation, a financial
                           holding company, provides banking and nonbanking financial
                           services in the United States and internationally.
                       2. U.S. Bancorp: U.S. Bancorp operates as the holding company for
                           U.S. Bank that provides commercial banking and financial services
                           in the United States. The bank engages in generating deposits and
                           originating loans.
                       3. Washington Mutual, Inc.: Washington Mutual, Inc., together
                           with its subsidiaries, operates as a consumer and small business
                           banking company in the United States.


             WFC        BAC       USB      WM       Industry
Cap:        117.96B 219.09B      58.04B   38.16B    31.17B
ees:         158,000   203,425   50,423    49,824   33.60K

Qtrly Rev
(yoy):        7.40%     3.00%    -1.40%   -4.30%    22.20%
(ttm):       34.08B    68.07B    13.00B   13.69B      7.71B
(ttm):          N/A       N/A       N/A       N/A   31.08%
(ttm):          N/A       N/A       N/A       N/A     2.07B
(ttm):        56.10%     57.78% 62.51% 50.87%           47.23%
(ttm):          8.71B     21.34B     4.67B     2.91B      2.88B
(ttm):            2.55     4.686     2.603       3.52       3.74

P/E (ttm):      13.85      10.54     12.82      12.29     12.84

PEG (5 yr
expected):        1.25       1.33       1.5      1.07       1.39

P/S (ttm):         3.5       3.23      4.48      2.82       3.39

         Looking at the chart above, one will notice that Wells Fargo is the second largest
company among these competitors based on market capitalization. However, after close
examination of the statistics above, one will notice that Bank of America is earning a better
return for their investors than Wells Fargo. Bank of America is much larger than Wells Fargo;
their revenue and net income are far greater than their competitors. However, the most important
statistics to look at are the EPS and P/E. Wells Fargo has the lowest EPS among its competitors
above. This is a troubling sign for investors because there are other firms in the industry that
offer a better return with comparable risk. Additionally, the P/E of Wells Fargo is higher than
any of the other firms listed above. The P/E ratio shows how much it costs to make $1 off that
stock. So, by looking at the P/E ratios above, one will notice that it costs more to make $1 off of
Wells Fargo than any of the other firms above. When compared to the industry, Wells Fargo is
lagging behind in both their EPS and P/E ratios.
        The chart above shows the returns of Wells Fargo, Bank of America, Washington
Mutual, U.S. Bancorp and the S&P 500. Note that WFC has underperformed USB and BAC for
the better part of the last year. WFC has outperformed BAC over the past two months, but is still
vastly underperforming the S&P.

                               WFC VS. INDUSTRY LEADERS

                         Statistic                            Industry Leader     WFC
Market Capitalization                                     C            255.48B 117.89B 4 / 19
P/E Ratio (ttm)                                           NBOH.OB         41.47   13.85 6 / 19
PEG Ratio (ttm, 5 yr expected)                            KEY              2.25     1.24 9 / 19
Revenue Growth (Qtrly YoY)                                JPM           25.20%    7.40% 12 / 19
EPS Growth (Qtrly YoY)                                    JPM           56.10% 10.50% 10 / 19
Long-Term Growth Rate (5 yr)                              FDC           12.11% 10.42% 3 / 19
Return on Equity (ttm)                                    TCB           26.54% 19.77% 6 / 19
Long-Term Debt/Equity (mrq)                               FDC             0.232             N/A
Dividend Yield (annual)                                   OFG            5.00%    3.10% 13 / 19
        Looking at the chart above, one will notice that Wells Fargo is performing relatively well
within the industry, but is not outstanding in any individual area. Their long-term growth rate of
10.42% is a positive sign to investors showing that Wells Fargo has been growing at a faster rate
than most of their competitors over the past 5 years. However, Wells Fargo’s revenue growth
and EPS growth are relatively low compared to their competitors.

Leaders in Market Capitalization

CITIGROUP INC [C]                                                                        $254.7 B
BK OF AMERICA CP [BAC]                                                                   $219.1 B
JP MORGAN CHASE CO [JPM]                                                                 $166.7 B
WELLS FARGO & CO NEW [WFC]                                                               $118.0 B
WACHOVIA CP [WB]                                                                          $99.5 B
ROYAL BANK OF CANADA [RY]                                                                 $68.2 B
TORONTO DOMINION [TD]                                                                     $49.7 B
BANK OF NOVA SCOTIA [BNS]                                                                 $48.5 B
BANK OF NY MELLON CP [BK]                                                                 $33.8 B
SUNTRUST BANKS [STI]                                                                      $31.1 B

Laggards in Market Capitalization

OHIO LEGACY CORP [OLCB]                                                                   $18.0 M
NATIONAL BANCSHARES CORP OHIO [NBOH.OB]                                                   $39.7 M
UNITED BANCSHARES( [UBOH]                                                                 $53.0 M
ORIENTAL FIN GROUP [OFG]                                                                 $267.5 M
T C F FINANCIAL CORP [TCB]                                                                  $3.6 B
CANADIAN IMP BK COMM [CM]                                                                   $3.8 B
KEYCORP [KEY]                                                                             $13.7 B
FIRST DATA CP [FDC]                                                                       $24.8 B
P N C FIN SVCS GR [PNC]                                                                   $25.2 B
SUNTRUST BANKS [STI]                                                                      $31.1 B

Leaders in P/E Ratio (ttm)

FIRST DATA CP [FDC]                                20.10
TORONTO DOMINION [TD]                              15.94
SUNTRUST BANKS [STI]                               15.05
ROYAL BANK OF CANADA [RY]                          14.29
WELLS FARGO & CO NEW [WFC]                         13.85
BANK OF NOVA SCOTIA [BNS]                          13.48
T C F FINANCIAL CORP [TCB]                         13.39
KEYCORP [KEY]                                      12.78
CITIGROUP INC [C]                                  12.29

Laggards in P/E Ratio (ttm)

CANADIAN IMP BK COMM [CM]                                                                   1.40
P N C FIN SVCS GR [PNC]                                                                     8.14
BK OF AMERICA CP [BAC]                                                                     10.54
JP MORGAN CHASE CO [JPM]                                                                   10.79
WACHOVIA CP [WB]                                                                           10.97
BANK OF NY MELLON CP [BK]                                                                  11.25
UNITED BANCSHARES( [UBOH]                                                                  11.41
CITIGROUP INC [C]                                                                          12.29
KEYCORP [KEY]                                                                              12.78
T C F FINANCIAL CORP [TCB]                                                                 13.39

          The charts above show the Leaders and Laggards in two important categories of the
Money Center Banks industry. Wells Fargo has the 4th highest Market Capitalization in the
industry. This shows that investors have been showing confidence in this stock over the past
several years. Their P/E ratio, which investors closely scrutinize, is the 6th highest in the

3. Valuation

Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of                                 13.41%

Owner Earnings in 2006:
Net Income                           $      8,482,000,000.00
Depreciation                         $      3,221,000,000.00
Amortization                         $                   -
Capital Expenditures                            ($1,252,000,000.00)
Owner Earnings                       $     10,451,000,000.00

Residual Value
Owner Earnings in year 10                  21,481,656,555.1
Second Stage Growth Rate (g) (add)                            2.50%
Owner Earnings in year 11                  22,018,697,969.0
Capitalization rate (k-g)                                  10.91%
Value at end of year 10                    201,821,246,278.32

Present Value of Residual                       $57,339,431,039.10
Intrinsic Value of Company                     $152,079,571,045.36
Shares outstanding assuming dilution                   3,340,000,000
Intrinsic Value per share                                     $45.53

Using the Buffet model for valuating stocks, it was found that the intrinsic value of a share of
Wells Fargo stock is $45.53. I used a discount rate of 13.41%, which I calculated using the
Capital Asset Pricing Model. Wells Fargo has a beta of 0.39, which seems to be very low
compared to some of their competitors. With Wells Fargo currently trading at $35.33 per share,
it would appear that it has some room to grow. I believe that my valuation is a little aggressive
since most analysts agree that a High Target for the stock is $43 per share. The mean target is
$39.81. Their estimates are much more conservative which is why I have a recommendation of

                                PRICE TARGET SUMMARY
Mean Target:                                                            39.81
Median Target:                                                          40.00
High Target:                                                            43.00
Low Target:                                                             34.50
No. of Brokers:                                                         22

4. Financials (numbers from April 17, 2007 report)
A. Income Statement
        1. Net Income increases during this quarter by 2.89% to $2.18B from $2.01B.
        2. Revenue increases by 0.29%, from $9.413B to $9.441B

B. Balance Sheet
         1. There was an increase in loans from $319,100,000,000 to $325,487,000,000 in the 1st
         quarter of 2007. Assets increased from $481,996,000,000 to $485,901,000,000.
         2. Stockholders’ Equity increased slightly from $45,876,000,000 to $46,135,000,000
         meaning that a considerable amount of money was reinvested in the company in the 1st

5. The Economy
        1) The economic and industry environment for banking is very stable, but highly
regulated. Interest rates are holding relatively steady meaning that the banking industry will
continue to turn solid profits for the foreseeable future. .
        2) The financial sector is crucial to the continued growth and well being of the economy.
Since the banking industry plays such an important role within the economy, demand for their
products and services will always exist. Therefore, the banking and financial services companies
will continue to be profitable, regardless of economic impact. Tight government regulations of
the banking industry will also inhibit the collapse of many of these institutions. This is crucial
because the banking industry, along with risk-free investments, serves as a safe haven during
economic recession.

6. Recommendation
          After close examination of Wells Fargo, I do believe that it is a profitable stock with a
positive outlook for the future. With a long-term growth rate of around 10%, profits look to stay
strong into the future. Most analysts believe that WFC is a diamond in the rough and advise a
long-term hold strategy. Based on those opinions in addition to the evaluation statistics above, I
recommend a hold strategy on Wells Fargo’s stock. The reason I do not advise a buy is that we
are looking to decrease our position in financials and with it not being the most profitable
industry at the moment; I believe that we should hold our position in Wells Fargo while investing
more money in more profitable industries such as oil and gas.

                    Analysts RECOMMENDATION TRENDS July 2007

                                                                                 Three Months
                      Current Month        Last Month       Two Months Ago
Strong Buy                   6                  6                   6                   4
Buy                         12                  12                 12                  13
Hold                         7                  7                   7                   8
Sell                         1                  1                   1                   1
Strong Sell                  0                  0                   0                   0
7. Appendices

A. Income Statement

PERIOD ENDING                             31-Dec-06    31-Dec-05    31-Dec-04
Total Revenue                            47,998,000   40,527,000   33,891,000
Cost of Revenue                           7,174,000    3,848,000    1,827,000

Gross Profit                             40,824,000   36,679,000   32,064,000

    Operating Expenses
    Research Development                          -            -            -
    Selling General and Administrative   20,742,000   19,018,000   17,573,000
    Non Recurring                                 -            -            -
    Others                                2,223,000    2,503,000    1,732,000

    Total Operating Expenses                      -            -            -

Operating Income or Loss                 17,859,000   15,158,000   12,759,000

    Income from Continuing Operations
    Total Other Income/Expenses Net               -            -            -
    Earnings Before Interest And Taxes   17,859,000   15,158,000   12,759,000
    Interest Expense                      5,114,000    3,610,000    1,990,000
    Income Before Tax                    12,745,000   11,548,000   10,769,000
    Income Tax Expense                    4,263,000    3,877,000    3,755,000
    Minority Interest                             -            -            -

    Net Income From Continuing Ops        8,482,000    7,671,000    7,014,000

    Non-recurring Events
    Discontinued Operations                       -            -            -
    Extraordinary Items                           -            -            -
    Effect Of Accounting Changes                  -            -            -
    Other Items                                   -            -            -
Net Income                            8,482,000     7,671,000    7,014,000

B. Balance Sheet

PERIOD ENDING                        31-Dec-06      31-Dec-05     31-Dec-04

Current Assets
    Cash And Cash Equivalents       20,635,000     26,302,000    21,903,000
    Short Term Investments           6,078,000      5,306,000     5,020,000
    Net Receivables                 10,195,000     13,989,000             -
    Inventory                                -              -             -
    Other Current Assets                     -              -             -

Total Current Assets                         -              -             -
Long Term Investments              415,326,000    407,547,000   363,904,000
Property Plant and Equipment         8,212,000      7,831,000     3,850,000
Goodwill                            11,275,000     10,787,000    10,681,000
Intangible Assets                      383,000        489,000             -
Accumulated Amortization                     -              -             -
Other Assets                         9,892,000      9,490,000    22,491,000
Deferred Long Term Asset Charges             -              -             -

Total Assets                       481,996,000    481,741,000   427,849,000

Current Liabilities
    Accounts Payable                25,903,000     23,071,000    19,583,000
    Short/Current Long Term Debt    12,829,000     23,892,000    21,962,000
    Other Current Liabilities      310,243,000    314,450,000   274,858,000

Total Current Liabilities                    -              -             -
Long Term Debt                      87,145,000     79,668,000    73,580,000
Other Liabilities                                      -                  -                -
Deferred Long Term Liability Charges                   -                  -                -
Minority Interest                                      -                  -                -
Negative Goodwill                                      -                  -                -

Total Liabilities                           436,120,000        441,081,000      389,983,000

Stockholders' Equity
Misc Stocks Options Warrants                           -                  -                -
Redeemable Preferred Stock                             -                  -                -
Preferred Stock                                 384,000            325,000          270,000
Common Stock                                   5,788,000          2,894,000        2,894,000
Retained Earnings                            35,277,000         30,580,000       26,482,000
Treasury Stock                                (3,203,000)        (3,390,000)      (2,247,000)
Capital Surplus                                7,739,000          9,934,000        9,806,000
Other Stockholder Equity                        (109,000)           317,000          661,000

Total Stockholder Equity                     45,876,000         40,660,000       37,866,000

Net Tangible Assets                         $34,218,000        $29,384,000      $27,185,000

C. Cash Flows

PERIOD ENDING                                     31-Dec-06        31-Dec-05      31-Dec-04
Net Income                                        8,482,000        7,671,000      7,014,000

Operating Activities, Cash Flows Provided By or Used In
Depreciation                                       3,221,000       4,161,000      3,449,000
Adjustments To Net Income                         8,295,000 (12,936,000)         11,490,000
Changes In Accounts Receivables                    (291,000)   (796,000)            (196,000)
Changes In Liabilities                            3,062,000   3,896,000            1,779,000
Changes In Inventories                                    -           -                    -
Changes In Other Operating Activities             9,325,000 (11,329,000)          (3,448,000)

Total Cash Flow From Operating Activities        32,094,000       (9,333,000)    20,088,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures                                        -            -            -
Investments                                       (10,332,000) (27,255,000) (52,609,000)
Other Cashflows from Investing Activities         (10,368,000) (2,814,000)     (428,000)

Total Cash Flows From Investing Activities        (20,700,000) (30,069,000) (53,037,000)

Financing Activities, Cash Flows Provided By or Used In
Dividends Paid                                     (3,641,000)   (3,375,000)    (3,150,000)
Sale Purchase of Stock                               (201,000)   (1,792,000)     (917,000)
Net Borrowings                                     (3,510,000)    9,775,000     7,058,000
Other Cash Flows from Financing Activities         (4,411,000)   37,288,000    27,314,000

Total Cash Flows From Financing Activities        (11,763,000)   41,896,000    30,305,000
Effect Of Exchange Rate Changes                             -             -             -

Change In Cash and Cash Equivalents                ($369,000)    $2,494,000    ($2,644,000)

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