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Why Wells Fargo Rose 3% despite Weak Q2 Results

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Wells Fargo (NYSE:WFC) stock rose 2.7% in the pre-market trading session today at 7:34 AM ET. Meanwhile, the S&P futures rose 1.1% and the Dow futures rose 1.4%. The broader markets have risen following positive results for Moderna’s COVID-19 vaccine candidate.

On Tuesday, Wells Fargo reported lower-than-expected earnings results for the second quarter of 2020. The financial services company missed analysts’ consensus sales and earnings estimates. The company also expects to reduce its quarterly dividend by nearly 80%. 

Wells Fargo’s Q2 earnings results

In the second quarter, Wells Fargo reported an adjusted EPS of -$0.66 compared to $1.30 in the second quarter of 2019. The earnings missed analysts’ consensus estimate of -$0.20 per share. Wells Fargo generated sales of $17.8 billion—a reduction of 17.4% from the second quarter of 2019. The company missed analysts’ consensus revenue estimate of $18.4 billion.

According to a MarketWatch report, “Wells Fargo Chief Executive Charles Scharf said on the post-earnings conference call with Wall Street analysts that the effect of the COVID-19 pandemic on consumers and the overall economy substantially impacted results, as it led to the bank adding $8.4 billion to the allowance for credit losses.” The report also said, “Scharf said the asset cap placed on the bank by the Federal Reserve also hurt, as the bank couldn’t grow its balance sheet to offset the lower interest rate environment, which led to a 13% drop in net interest income.”

Wall Street analysts expect Wells Fargo to report an adjusted EPS of $0.33 on revenue of $18.3 billion in the third quarter. Analysts also expect Wells Fargo’s revenues to fall by 14.5% YoY (year-over-year) in 2020 to $72.7 billion. The sales could rise by 1.5% YoY in 2021 to $73.8 billion. The adjusted earnings will likely fall by 89.7% YoY in 2020 to $0.45 per share. However, the profits could rise YoY to $2.28 per share in 2021.

Analysts’ recommendations for Wells Fargo

Among the 29 analysts following Wells Fargo stock, five recommend a “buy,” 18 recommend a “hold,” and six recommend a “sell.” Wall Street analysts’ mean target price on the stock is $30.23, which implies a 24.7% gain from the current level of $24.25. The consensus target price for the stock has fallen from $31.56 in June—a reduction of 4.2%.

Many analysts revised their target price for Wells Fargo stock after its second-quarter earnings report.

  • Piper Sandler decreased its target price from $29 to $25.
  • RBC decreased its target price from $29 to $25.
  • KBW decreased its target price from $30 to $27.
  • Evercore ISI increased its target price from $26 to $27.
  • Barclays decreased its target price from $40 to $33.

Peer comparison

JPMorgan Chase’s (NYSE:JPM) second-quarter revenue increased by 14.4% YoY. However, the company’s revenue of $33.8 billion beat Wall Street’s forecast of $30.3 billion. Meanwhile, the company’s adjusted EPS fell 45.0% YoY to $1.38. Wall Street analysts expected an adjusted EPS of $1.04.

In the second quarter, Citigroup (NYSE:C) reported revenue of $19.8 billion—5.4% growth from $18.8 billion in the second quarter of 2019. Citigroup beat Wall Street analysts’ consensus estimate of $19.1 billion. The company’s adjusted EPS of $0.50 was above analysts’ estimate of $0.28 per share in the second quarter. However, the company posted an adjusted EPS of $1.83 in the second quarter of 2019.

Stock returns

Wells Fargo stock fell 4.6% on Tuesday and ended the day at $24.25. At this closing price, the company’s market capitalization is $99.4 billion. Notably, the stock is trading 55.7% below its 52-week high of $54.75 and 10.2% above its 52-week low of $22.00.

Based on the closing price on Tuesday, Wells Fargo stock was trading 6.7% below its 20-day moving average of $26.00. The stock is also trading 8.4% below its 50-day moving average of $26.46 and 16.8% below its 100-day moving average of $29.15. Wells Fargo’s 14-day relative strength index number is 40. The number suggests that the stock is near oversold levels.

Wells Fargo stock has an upper Bollinger Band level of $28.56, while its middle Bollinger Band level is $26.00. On Tuesday, the stock closed near its lower Bollinger Band level of $23.43, which indicates that it’s oversold.

To learn more, read Wells Fargo Stock Might Be a Risky Bet for Investors and Why George Soros Sold Most of His Financial Stocks.

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