The latest market buzz says that Wachovia's (NYSE:WB) shares are a bargain. Let's take a closer look at whether the Wall Street wags have their story straight.

The price you pay
As of the latest quarterly report, Wachovia had 1.92 million shares outstanding. At the going rate of roughly $48 per share, the entire company carries a $92 billion price tag. This is an important step when evaluating a stock: just pretend you're buying the whole firm. If it makes sense to buy 100% of Wachovia for $92 billion, it'll make sense to buy 0.01% on the same economic terms.

And the value you get?
In return for that $92 billion, you get a bank with about $720 billion in assets, including $430 billion in loans and $106 billion in securities, which is financed by approximately $413 billion in deposits, $142 billion in long-term debt, and $70 billion in book value. Wachovia ranks as the fourth-largest domestic bank by assets and the third-largest by deposit market share. It also owns the second-largest retail brokerage arm, counting its pending merger with AG Edwards (NYSE:AGE).

At a glance, Wachovia's financials look compelling. The company earned $4.6 billion in the first half of 2007, meaning that shares trade at about 10 times run-rate earnings. Excluding merger-related and restructuring costs, the company targets a 51.5%-53.5% efficiency ratio. According to a US Bancorp (NYSE:USB) presentation, that figure compared favorably to its peer group's 2007 Q1 average of 57.6%.

I also like that Wachovia, like high-performing peers such as US Bancorp and PNC Financial (NYSE:PNC), sports a very healthy mix of income streams. Net interest income, the spread a bank earns between the money it pays to depositors and the yield it garners from loans, only accounted for about half of Wachovia's revenue.

The other half came from non-interest or fee income. Investors look favorably on such a high mix, because fee income insulates a bank from capricious changes in the interest rate curve. It also tends to earn higher returns on capital. Wachovia's fee income came from a variety of sources, including service charges and bank fees, commissions, asset-management fees, and investment banking fees.

So why's it cheap?
If Wachovia's such a great bank, why's it trading at a paltry 10 times trailing income? First off, banks as a sector sold off when the subprime scare hit the fan. Wachovia shares are also suffering from investors' negative perception of its merger with mortgage giant Golden West last year. Rising delinquencies have wreaked havoc on the industry, resulting in bankruptcy filings at lenders such as New Century and American Home Mortgages. Meanwhile, Wells Fargo (NYSE:WFC) and General Electric (NYSE:GE) exited the subprime business, and Capital One (NYSE:COF) closed its wholesale mortgage unit. It's not hard to figure out why investors might be nervous about Wachovia's mortgage exposure.

Staying the course
However, there might be more to the story than meets the eye. Wachovia's credit quality remains statistically impressive, and it has less than 0.5% exposure to subprime mortgages.

In a Wachovia presentation, the company noted that its net charge-off ratio of 0.14% in the second quarter of 2007 was less than half the peer group's average of 0.37%. The ratio of nonperforming assets as a percent of total loans, at 0.48%, also compared favorably to the industry average of 0.60%. Lastly, pre-tax pre-provision earnings covered charge-offs (a measure Warren Buffett once used as part of his thesis to buy shares in Wells Fargo) 25.8 times over, far surpassing the average 10 times coverage rate of Wachovia's peer group.

On its balance sheet, consumer mortgages composed about 39% of Wachovia's loan portfolio. Of the total consumer real estate loan portfolio, the underwriting seemed solid, with a 70% average loan-to-value ratio (LTV), 85% secured by a first lien, and an average FICO score of 699.

Wachovia also believes it sports superior underwriting. In a presentation, it noted that its "pick-a-pay" mortgage payments were designed to increase by 7.5% a year, in contrast to competitors' option ARM loans, which might see payment jumps of 141%. Obviously, in this example, Wachovia's underwriting on option ARMs was more prudent, and less likely to default.

In addition, of the $57.7 billion in home equity loans and lines of credit Wachovia held on its balance sheet, 14% had LTVs greater than 90%. Of the $162 billion in mortgage loans, 2% were more than 90%, and of the total consumer real estate portfolio, 5% had LTVs greater than 90%.

Foolish final thoughts
Wachovia's a huge bank with many moving parts, so a buy/sell decision would require some additional due diligence. However, I believe there's more than enough evidence to say that Wachovia shares are definitely worth a look at about $50 per share, and might be a very smart long-term investment.

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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy you can bank on.