Premium valuation against peers
Analysts consider the PBV (price-to-book value) ratio the best multiple to value companies in the insurance, finance, and banking space, as these firms have significant liquid and tangible assets on their books. A PBV multiple that’s less than 1.0 indicates that the stock is undervalued and considered a good buy.
However, in a bullish market scenario, finding stocks that are trading below their book values can be a challenge. Stocks that are trading below the industry average, as well as the multiples of their peers, could be a good option in such a situation.
Wells Fargo (WFC) currently trades at a PBV multiple of 1.39x, a slight discount to the industry average of ~1.5x. However, the stock’s valuations are higher than those of its close peers. Citigroup (C), Goldman Sachs (GS), and Bank of America (BAC) have PBV ratios of 0.89x, 1.03x, and 1.17x, respectively.
Relying entirely on the PBV ratio may not always be reflective of a company’s performance, as stock prices also reflect long-term expected earnings growth. A company may have a low PBV ratio for other reasons, including a highly volatile business, weak earnings, and a highly leveraged balance sheet.
Apart from this, a company that’s in a mature or declining phase may also have a low PBV ratio. So, investors may wish to examine other valuation indicators such as the PE (price-to-earnings) ratio.
Wells Fargo currently trades at a trailing-12-month (or TTM) PE ratio of 13.94x, which is considerably lower than the industry average of 17.94x. When compared with its peers, the stock trades at a premium. The TTM PE ratios for Citigroup, Goldman Sachs, and Bank of America are 11.76x, 9.95x, and 13.91x, respectively.
Based on Wall Street’s earnings estimates for the next 12 months (or NTM), Wells Fargo, Citigroup, Goldman Sachs, and Bank of America have forward PE ratios of 12.04x, 9.86x, 11.65x, and 11.13x, respectively.
The Oppenheimer S&P Financials Revenue ETF (RWW) holds ~6.8% of its portfolio in Wells Fargo stock.