Henry Wells and William G. Fargo founded the venerable Wells Fargo
The current Wells Fargo is as much a descendant of Midwestern-based Norwest, who purchased Wells in 1998 and kept the Wells Fargo name. The acquisition has gone well, allowing Wells to continue with what is now a 20-year streak of double-digit sales and earnings growth. More specifically, Wells has grown sales 12% annually and earnings 14% annually over that time frame. That pace has slowed over the past five years as sales have advanced only 9.5% annually, but earnings have only dipped slightly to 13.8% growth each year.
So how does Wells do it? The company attributes its steady pace of growth to cross-selling, to which it professes "is the essence of our business model and key to our ability to grow revenue and earnings." That means a focus on selling a client with a savings or checking account a Wells Fargo mortgage product or persuading them to open a brokerage account with the bank. It seems so straightforward, but eludes even the best of firms; it was Sandy Weill's primary motivation for building his Citigroup
More recently, Bank of America
Wells Fargo has largely avoided the industry's merger frenzy of the past few years. This has allowed it to focus internally on its consumers and local businesses and driving front-line employees to sell additional products to its clients. Wells Fargo refers to its banks as "banking stores", illustrating a focus on developing and maintaining a sales culture. This has allowed growth to consistently hit the double digits across most product lines, stemming from banking, private client services, lending, and commercial real estate services, just to name a few. And we all know that organic growth is less risky than buying market share from external sources.
In terms of traditional bank metrics, Wells stands up with the best of its banking peers. It consistently posts returns on average equity close to 20%, high net interest margins, and industry-leading deposit growth. It also aims for 1.75% return on assets and traditionally comes close to the mark.
Sure, Wells Fargo is as susceptible as any bank to the current inverted yield curve that makes it difficult to earn a spread on the difference between the money it earns by making loans to that it must pay for client deposits. It is also not immune to housing related worries and subsequent influences on mortgage loans and real estate activity. And finally, due to its growth bias it trades at a higher valuation and doesn't yield as much as its giant banking peers.
But Wells has a very long-term track record of profitability navigating and expanding its operations through nearly any business cycle or economic environment. That's why it's my pick for best financial stock for 2007.
What do you think of Wells Fargo's prospects? Go to Motley Fool CAPS right now and make your voice heard. If you agree with me, rate it "outperform," or if you don't, rate it "underperform." Based on your responses, we'll crown the "Best Financial Stock for 2007" sometime next week.
Bank of America and JPMorgan are Income Investor recommendations.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.