Mr. Market's expectations can be awfully greedy sometimes. After reporting a record quarterly profit of $5.2 billion for the first quarter of 2013, shares of Wells Fargo (NYSE: WFC ) traded lower.
However, here at the Fool, we do not let earnings from one quarter cloud our judgment about the overall position of the company. Wells Fargo currently trades at the richest multiples compared to its competitors JPMorgan Chase, Bank of America, and Citigroup, and these quarterly results confirmed why. While others are still cleaning up legacy issues and determining long-term strategies, Wells Fargo is continuing to fire on all cylinders and build relationships.
3 reasons to love Wells Fargo's earnings
While the market sold off the stock upon the earnings release, there are some things to love about the bank's current position:
1. The profit engine: The quarterly income was the highest in the bank's history, and the company has increased EPS for 13 consecutive quarters.
2. Flowing credit: Although overall loan demand remains tepid, Wells Fargo grew its total loan book by 4.2%, mostly in the commercial lending space.
3. Capital cushion and massive deposit base: Retail deposits continue to flow into the giant money center, and capital ratios sit at healthy levels that allow the bank to engage in share buybacks and dividend increases.
To learn more about these areas of strength, click here to read Amanda Alix's full analysis.
3 reasons to hate Wells Fargo's earning
Despite the record earnings, Wells Fargo is not spared from some damaging industry headwinds:
1. Declining mortgage business: As expected, Wells Fargo's mortgage banking income dropped 9% from the previous quarter as volume decreased and profit margins were squeezed.
2. NIM compression: The bank's net interest margin crept lower as the lower interest rate environment resulted in fewer investment opportunities as deposits grew.
3. Lower overall revenue: Despite beating earnings estimates, the bank missed overall revenue expectations as they continue to search for new revenue opportunities.
To learn more about these potential weaknesses, click here to read John Maxfield's full analysis.
One of the more encouraging topics covered during Wells Fargo's earnings conference call was the improving housing market. While overall volumes declined as refinancing acticvity slowed, home purchase volume in the bank's pipeline was a bright spot.
"A year ago, our pipeline starting the second quarter was $79 billion; and now we're at $74 billion. And 35% of that $74 billion pipeline is purchase money activity. That is an increase from about 24% a year ago."
–Tim Sloan, CFO
Although lower volume will undoubtedly hinder growth in the bank's mortgage banking segment, more Americans purchasing homes is a positive sign for the broader U.S. economy, which ultimately strengthens Wells Fargo.
To read more key quotes from Wells Fargo's earning call, click here.
Despite the market's slightly negative reaction to the earnings report, Foolish investors have many reasons to be encouraged. Wells Fargo's profit engine will surely continue to generate steady earnings, which will allow for incremental dividend increases as well as share buybacks. While the overall company will certainly perform in step with the broader U.S. economy, Stumpf's leadership should continue to give the bank the edge as opportunities arise.
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.