The Case That Wells Fargo Shares Have Peaked in Value

Sterne Agee’s Todd Hagerman downgraded Wells Fargo shares on Friday morning, from Buy to Neutral. The firm’s $42 price target remains in place, as the analyst thinks shares are close to being fully valued.

Hagerman still thinks that the bank’s outlook remains constructive, but earnings growth is clearly moderating into 2014. He said:

The slowing momentum is only exacerbated by the stubbornly low rate environment and normalizing mortgage banking revenues. With the shares trading at 10.2-times 2014 earnings per share, our sense is that meaningful multiple expansion from current levels is unlikely.

Some additional key points are that the high performance of the company does deserve a premium multiple, but more modest earnings growth should limit the stock’s upside. The firm also thinks that Wells Fargo has a better outlook than its money center banking peers. Unfortunately, its case is that the bank’s stock price is fully valued. To rationalize material upside to the current price target, Sterne Agee’s note put the caveat out that earnings would have to exceed $4.75 per share, versus the $4.00 per share expected. Another bit of caution for this call is that Hagerman’s estimate of $4.00 per share in 2014 compares to the Thomson Reuters consensus estimate of $3.90 in earnings per share.

From a safety of operations and safety of your deposit money perspective, 24/7 Wall St. named Wells Fargo was the safest of the seven large banks in 2013. Unfortunately, that is not enough to overcome an argument over a full valuation. Wall Street has sold Wells Fargo shares on the cautious report.

In order to show the other side of the coin: Jefferies actually reiterated its Buy rating and raised the price target from $42 to $44. The take there is that Wells Fargo will be able to keep growing its earnings.

Wells Fargo shares are down 0.8% at $40.60, against a 52-week trading range of $31.25 to $41.69. The Stern Agee price target of $42 for the stock compares to a consensus target price of $41.32 from Thomson Reuters.