Fool on the Street: Rock-Solid Wells Fargo

Back in January, I tagged Wells Fargo (NYSE: WFC  ) as the best financial stock for 2007. Well, here we are at the end of May and the shares are about flat from where they started the year. However, a recent presentation at the annual Lehman Brothers (NYSE: LEH  ) Financial Services Conference renewed my confidence that Wells Fargo is a rock-solid financial institution with a number of qualities that set it apart from the competition.

Focus on internal growth
Before introducing Chief Financial Officer Bob Strickland, a Lehman Brothers analyst highlighted that Wells Fargo has posted double-digit earnings growth in all but three of the past 20 quarters. That's not bad for a company with close to $500 billion in assets and a $120 billion market capitalization. Even more impressive, this continues a run of stellar growth; over the past 20 years, Wells Fargo has grown sales 12% and earnings 14% each year on average.

Strickland opened his presentation by touting the bank's unmatched growth track record and said its strategy of "essentially bringing practices of highly successful growth-focused retailers to financial services" was unique in the industry and the primary reason it has "been able to pull away from the pack." Indeed, Wells Fargo has focused on organic, or internal, growth, while archrivals such as Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , JPMorgan (NYSE: JPM  ) , and Wachovia (NYSE: WB  ) look to acquire market share.

Room to run
Even with its double-digit growth, Wells Fargo estimates it only controls 3.5% of total financial services profit and about 5% of the national deposit market. This leaves ample opportunity to continue to grow in consumer and commercial lending, as it has over the past five years. Its culture also focuses on "retail cross-sell" by training employees to find new sales opportunities for existing clients by pitching the services of the about 80 businesses Wells Fargo is involved in.

An industry leader
Wells Fargo has also been able to post one of the higher net interest margins in banking, even though a flat to inverted yield curve has condensed the spread banks make by paying interest on deposits and earnings interest from loans and other business activities. Somehow, Wells Fargo has been able to keep its non-interest bearing checking accounts as the majority of overall deposits, which serves to lower its cost of funds and kept the net interest margin, or NIM, at 4.95% during its first quarter.  

As a comparison, Citigroup posted a much lower 2.46% NIM while Wachovia came in at 3.01%, and Wells Fargo was one of the only banks to increase its margin year over year, despite a challenging yield curve environment. Strickland detailed that Wells Fargo has increased its NIM by 12 basis points since mid-2004, while peers' basis points have declined by 33 to 34 over the same time.

Wells Fargo also said that its 1.89% return on assets leads the industry and its return on equity consistently runs near 20%, both of which are impressive levels of key banking metrics.

Other highlights
The presentation was chock full of useful market share and other data. Wells Fargo professed to being "the nation's second-largest mortgage originator," with 12% market share, as well as the largest servicer of domestic mortgages, with 13% of the market. To date, it has avoided any subprime mortgage pitfalls by selling the mortgages it originates, as compared with holding them in its loan portfolio. Wells Fargo also estimates it is the "nation's largest bank-owned insurance agency and the fifth-largest broker in the world," giving Marsh & McLennan (NYSE: MMC  ) a run for its money.

These stats demonstrate to me that Wells Fargo's cross-selling culture works in nearly every realm of financial services, be it banking, insurance, or investment management; it now has more than $1 trillion in assets under management and administration.

The Foolish bottom line
As I mentioned, Wells Fargo's share price is flat so far this year, and it's actually only appreciated 35% overall in the past five years, even as sales and earnings growth have continued their double-digit pace. One problem is that the earnings multiple has contracted; back in 2002 it averaged more than 20. At 14 times trailing earnings, the stock is one of the more richly valued big-bank stocks, and the company's dividend yield is among the lowest at 3.1%. However, Wells Fargo is peerless in terms of its expansion track record, and if it can keep cross-selling its way to similar levels of growth, it may turn out to be one of the best financial stocks for 2007 -- and beyond.                       

For related Foolishness:

Bank of America and JPMorgan are Income Investor recommendations. Want to get paid to invest? Analyst James Early can show you how with a free trial to the newsletter service.

Fool contributor Ryan Fuhrmann owns shares of Marsh & McLennan but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.


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