On January 2, Baird downgraded Wells Fargo (WFC) stock to “underperform” from “neutral.” Baird has a target price of $50. Analyst David George of Baird remains cautious on the bank and expects the improvement to take time.
Earlier, on December 2, Raymond James analyst David Long cited similar concerns and downgraded Wells Fargo stock to “underperform.” The analyst believes that Wells Fargo’s revenues could continue to decline in 2020, marking the fourth straight year of decline. Moreover, the profitability of Wells Fargo is likely to deteriorate further in 2020.
Wells Fargo stock underperformed peers in 2019
Shares of Wells Fargo closed about 17% higher in 2019. However, WFC stock underperformed peers as well as the broader markets. For instance, Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) stocks were up 53.5%, 42.9%, 42.8%, and 37.6%, respectively, in 2019. Meanwhile, the S&P 500 rose about 29% in 2019.
Lower credit off-take and higher expenses as a percentage of revenues remain a drag. Further, lower short-term rates and heightened competitive activity could pose challenges. Moreover, Wells Fargo stock trades at a higher valuation multiple compared to most of its peers. This could limit the upside.
The US Fed announced three successive rate cuts last year. We believe this is likely to hurt the NII (net interest income) of the banks. Wells Fargo cut its NII outlook for 2019, citing lower interest rates.
Moreover, we believe Wells Fargo will find it hard to drive revenues in 2020 as well.
Analysts expect Wells Fargo’s revenues to continue to decline in 2020. Analysts project a high-single-digit decline in Wells Fargo’s top line in the first three quarters of 2020. Further, analysts expect Wells Fargo’s bottom line to register a steep decline in the first half of 2020.
As for the full year, analysts expect Wells Fargo’s top and bottom line to mark a mid-single-digit decline in 2020.
Wells Fargo stock compared to peers
Wells Fargo stock trades at a forward PE multiple of 12.9x. This is well above most of its peers. For instance, shares of Citigroup, Goldman Sachs, and Bank of America trade at a forward PE of 9.5x, 9.6x, and 11.9x, respectively. However, JPM stock trades at a higher multiple as compared to peers.
Notably, both Citigroup and Bank of America stock trade at a lower valuation multiple than Wells Fargo. Yet, they both offer higher growth. Growth in loans and deposits, operating leverage, and share buybacks are likely to drive double-digit growth in Citigroup and Bank of America’s bottom line in 2020.
We believe Wells Fargo stock could continue to underperform peers in 2020 as well. Persisting headwinds are likely to stall growth.
Analysts stay on sidelines
Notably, bank stocks benefitted from sector rerating in 2019, which is not the case in 2020. Further, bank stocks might not fly high in 2020, owing to the lower interest rates and competitive headwinds. The majority of analysts stay on the sidelines on Wells Fargo stock.
15 among 28 analysts suggest “hold,” eight analysts recommend “sell,” and five analysts have a “buy” rating on WFC stock.
Analysts have a target price of $51.79 on WFC stock. This indicates a downside of 3.7% based on its closing price of $53.75 on January 2.