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Wells Fargo Is Valuable Compared to Peers in the Financial Sector

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Analysts expect upside in the stock

Since the beginning of 2015, Wells Fargo (WFC) has outperformed the financial sector as well as its peers. The Financial Select Sector SPDR ETF (XLF) represents the US financials sector. Year-to-date, XLF has lost 6%. In comparison, Wells Fargo has generated returns of -4.9%.

On October 9, the stock closed at $52.16. With an average consensus price target of $59.39 and a median target estimate of $59, the stock is still at a discount of 11.6% to analyst expectations. This suggests Wall Street is upbeat about Wells Fargo despite low interest rates and global weakness.

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This trend is also evident if we look at the ratings on the stock. Among the 39 analysts following the stock, 24 have assigned “buy” ratings. Shares of Wells Fargo have received three “sell” ratings and 12 “hold” ratings. If the company’s 3Q15 earnings beat analysts’ expectations, we could see some of these “hold” ratings change to “buy” ratings.

However, it must be noted that research brokerages have revised their estimated earnings per share (or EPS) down in nine instances in the past four weeks. EPS expectations have been revised up in six instances.

Valuations

Wells Fargo trades at a price-to-book multiple of 1.6x while the average price-to-book multiple for banks in the XLF ETF is 1.2x. Wells Fargo’s stock is the most expensive on a price-to-book basis among the large-cap banks within the XLF ETF. The only banks with higher price-to-book ratios than Wells Fargo are Northern Trust (NTRS) and US Bancorp with price-to-book multiples of 1.91x and 1.86x, respectively.

Large-cap peers like Citigroup (C), J.P. Morgan (JPM), and Goldman Sachs (GS) are trading at price-to-book multiples of 0.8x, 1.1x, and 1x, respectively.

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