WELLS

FARGO
Stock Evaluation Report

BUY
INTRINSIC VALUE = $58.31 >
CURRENT VALUE = $57.90

Colleen Keithley, Rakesh, Max Voronkov

SFSU: Fin 350 [R3-1594]
Professor Lawrence A. Souza
August 4, 2015
Overview
❖ Company Overview

❖ Financial Conditions

❖ Stock Valuations

❖ Recommendations
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 Mission Statement
"We’ll take the time to understand your complete
financial picture. Together, we work with you, now and
over time, to provide the best information and guidance
about the products and services you’ll need to help you
reach your financial goals. We sum up our promise in two
words: Working together."
Established: March 18, 1852 ~ Founder: Henry Wells & William Fargo

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 Business Segments
Wells Fargo specializes in:
★ Retail Banking
★ Global Cards
★ Corporate and Investment Banking

★ Mortgages
★ Insurance
★ Consumer/Commercial Finance
★ Corporate and Investment Banking
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 Products and Services
Wells Fargo’s Products and Service are:
Checking and Savings
Business Services
○ Checking and Savings
○ Payroll, Merchant Service
○ Debit Cards
Retirement, Insurance
○ Business Service Packages
○ International Business Services

Credit Options Online Banking

○ Credit Cards ○ Mobile Application
○ Loans and Lines of Credit

*Other: ATM, Worldwide Securities Service, Education Finance

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Operating Segment

(*WBR= Wealth, Brokerage, and Retirement)

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 Leadership
John G. Stumpf
1982 [32 year veteran]
Chairman, President and
Chief Executive Officer
B.A. St. Cloud State
University,
M.B.A. University of
Minnesota
from Northwest Bank Arizona.
John R. Shrewsberry
2001 [20 year veteran]
Senior EVP, Chief Financial
Officer
B.A. Claremont McKenna
College,
M.B.A. Yale School of
Management
Goldman Sachs
Michael J. Loughlin
1986 [35 year veteran]
Senior EVP, Chief Risk
Officer
University of California at
Berkeley
Mergerer from Crocker
Bank
Patricia R. Callahan
1979 [36 year veteran]
Senior EVP, Chief
Administrative Officer
Massachusetts Institute of
Technology
Merger from Crocker
National Bank
Kevin A. Rhein
1978 [34 year veteran]
Senior EVP, Chief
Information Officer
B.A. University of Illinois
M.B.A. University of
Chicago
From Citicorp/Citibank
David M. Carroll
1981 [34 year veteran]
Senior EVP, Wealth,
Brokerage, and
Retirement
University of North
Carolina at Chapel Hill
From First Union
National Bank
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 SWOT Analysis
Strengths: Weakness:
★ Strong brand name, financial position and credit-rating ➔ Customer Retention
★ Diverse products and services ➔ Low customer-care and satisfaction
➔ Legal issues

Opportunities: Threats:
➔ Banking with a mortgage 1. Changing government regulations and financial crisis--
➔ Wells Fargo cards in every WF wallet recessions
➔ Commercial banking of choice 2. Online frauds and scams
3. Banking overseas (Europe)

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 Industry Leaders
Rank Institution Name Location Total Assets (in Trillion)
1 JPMorgan Chase & CO. New York, NY $2.6

2 Bank of America Charlotte, NC $2.1

Corporation

3 CitiGroup Inc. New York, NY $1.8

4 Wells Fargo & San Francisco, CA $1.6

Company

5 GoldMan Sachs Group, Inc. New York, NY $0.9

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 Financial Conditions
Ratio Wells JPMorgan Citigroup Bank of Peers Industrial Conditions
Fargo America Average

Profitability ROA% 1.4 0.9 0.4 0.23 0.8 1.0 Good

ROE% 13.7 9.8 3.7 1.7 6.3 8.5 Good

Net Margin 25.9 23.9 9.5 4.9 16.2 9.7 Average

%

Leverage/ Debt to 1.2X 1.6X 1.3X 1.3X 1.8X 0.7X Average

Equity
Liquidity

Interest 12.5X 4.4X 2.3X 3.5X 3.9X 7.3X Good

Coverage

Overall: Good

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 Financial Ratio
Ratio Wells JPMorgan CitiGroup Bank of Peers Industrial Conditions
Fargo America Average

Equity Forward 13.5X 12.6 X 9.6X 9.6X 10.2X 16.8X Good

P/E

Dividend 2.5 2.6 0.1 1.0 1.4 2.0 Average

Yield%

Growth Revenue 0.7 1.8 -1.1 5.1 2.4 4.5 Below

Rate Growth% Average

Net Income 25.9 6.3 -5.1 -10.7 14.6 17.7 Good

Growth%

Overall: Good

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 Technical Analysis
● Upward trend line
● Approach to resistance
● Dropping Volume
● Flatting RSI & MACD

↓ Target
Stock Price
= $19.22
Sideways Trend

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 Perpetuity Model
Intrinsic Stock Value = $46.50 < Current Value = $57.90
Capital Asset Pricing Model
(CAPM) Return on Equity Stock Value $ Range
Risk Free Rate 2.2% 8% $58.13 High`
Beta 1.2

Expected Market 9.0%

10% $46.50 Medium
Return

Return on Equity 10% 12% $38.75 Low

Year 2013 2014 2015E 2016E g’’
● ROE = Risk Free Rate + Beta x (Expected Market Return - Risk Free Rate) = 10%
EPS $ $3.89 $4.10 $4.36 $4.65 6.44% ● Stock Value = EPS / ROE) = ($4.65 / 0.10) = $46.50
● g’’ = weighted EPS growth based on 3 segments from 2012-2014
● Source: US Department of Treasury, Value Line, Morningstar 13
 Gordon Growth Model
Intrinsic Stock Value= $58.13 > Current Value = $57.90
Capital Asset Pricing Model g 1% 2% 3% Range
(CAPM) R
Risk Free Rate 2.2%
8% $66.43 $77.50 $93 High
Beta 1.2

Expected Market 9.0% 10% $51.67 $58.13 $66.43 Medium

Return

Return on Equity 10% 12% $42.27 $46.50 $51.67 Low

Year 2013 2014 2015E 2016E g’’ ● Stock Value = Expected Earnings Per Share / (Return On Equity - Growth Rate)
Stock Value= $4.65 / (0.10 - 0.02) = $58.13
EPS $ $3.89 $4.10 $4.36 $4.65 6.44% ● g’’ = weighted EPS growth from 2012-2014
● Sources: US Department of Treasury, Value Line, Morningstar
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 Multiple Approach
Intrinsic Stock Value = $60.24 > Current Value = $57.90
EPS in 2016E g
P/E Stock Value Range

$4.65 6.4%
10x $46.5 Low

Year
P/E 2014 2015E 12x $60.5 Medium

Wells Fargo 13x 13x

14x $65.1 High
BOA 19x 19x

CITI 13x 13x ● P/E = Stock Price / EPS

● g = weighted EPS growth from 2012-2014

● Stock Value = P/E * EPS = 13 * $4.65 = 60.45

● Sources: Morningstar 15
 Discounted Cash Flows
Intrinsic Stock Value = $59.96 > Current Stock Value = $57.90
Weighted 2016 2017 2018 2019 2020 TV
60%
Debt g = 6.4% g = 6.4% g = 6.4% g = 5% g = 2% g=2%

EPS $ $4.65 $4.95 $5.26 $5.60 $5.88 $59.90

Weighted
40%
Equity
PV $ $4.23 $4.09 $3.95 $3.85 $40.84

Rdebt 5%
Intrinsic Value $59.96
WACC Stock Value Range
Requity 10%
6% $59.96 High

WACC 6% 8% $65.72 Medium

10% $71.85 Low

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 Results
Overall Intrinsic Value = $58.31 > Current Value = $57.90
Method Intrinsic Value Weight Weighted Value

Perpetuity $46.50 10% $4.65

Gordon Growth $58.13 20% $11.63

Multiple $60.24 20% $12.05

DCF $59.96 50% $29.98

Total $58.31

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 Recommendations
Overall Intrinsic Value = $58.31 > Current Value = $57.90

Trades:

o Buy Wells Fargo’s Stock on Margin

o Buy Call Options

o Write Put Options

o Financial Services ETFs 18

Choose to win,
Choose Wells Fargo.
Thank you.
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