Wells Fargo Has Too Many Headwinds To Invest In: Piper Jaffray Downgrades Stock

Wells Fargo & Co WFC reported lower-than-expected Q1 operating earnings of $0.89 per share. Piper Jafray’s Kevin J. Barker downgraded the rating for the company from Neutral to Underweight, while reducing the price target from $47 to $44.

Wells Fargo reported a disappointing Q1 performance due to higher-than-expected provisions and operating expenses. Analyst Kevin Barker added that the Street seems to be underestimating the company’s credit losses.

Negatives In The Wells Fargo Story

Barker enumerated the major negatives in the Wells Fargo story as:

• Street expectations appear very high. “We believe Street estimates remain too high for FY17 with NCOs at 42 bps, NIM at 2.99% and revenue growth of 5.2% Y/Y despite WFC recording average revenue growth of only 0.7% over the past four years,” the analyst wrote.
• Wells Fargo’s stock appears expensive compared to its historical valuations.
• The company’s credit losses have been moving higher while its reserves have remained tight.
• Expansion of Wells Fargo’s energy portfolio in the past several years and the associated auto credit are expected to put incremental pressure on the company in 2016 and 2017.

The EPS estimates for FY16 and FY17 have been reduced from $4.03 to $3.82 and from $4.10 to $3.83, respectively, to reflect a higher non-interest expense and a dovish rate environment.