I reviewed WFC and some reasons why Warren Buffett may like its long term prospects.
Wells Fargo & Company is a financial holding company and a bank holding company. The Company provides retail, commercial and corporate banking services through banking stores located in 23 states. It provides other financial services through subsidiaries engaged in various businesses, principally wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment. The Company operates in three business segments: Community Banking, Wholesale Banking and Wells Fargo Financial. In April 2007, First Data Corporation acquired the Instant Cash Services business, from Wells Fargo Bank.
Wells Fargo, WFC has a (5-year annual average) net income growth rate of 7.14 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does WFC have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
WFC has a current market price is 31.44 Using an assumed growth rate of 8 percent, the estimated Intrinsic Value is 48.47 per share from ValuePro.net, and this may or may not indicate a bargain of 17 dollars.
Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .65 , and a possible margin of safety of 35 percent.
The current price/earnings ratio = 13.2 and a Price/Book= 2.18
Using a debt to equity ratio of 3.21, Wells Fargo shows a current return on equity = 17.2
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of 3.21 However, you will recall that Buffett is tolerant of debt if it is being used to generate more intrinsic value.Does Wells Fargo make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised.
In terms of Opportunity Cost, is WFC the best place to invest our money today?What about growth in Free Cash Flow? Cash from Operating Activities: (2007 was not yet stated) 32,094.0 -9,333.0 6,485.0 31,195.0
To succeed in this industry, a company has to have sustainable competitive advantages in seven key areas: geography, products and businesses, distribution, sales and service culture, efficiency, brand, and most important, people. WFC is strong in all of them. WFC is a national company in wholesale banking, insurance, mortgage lending, and consumer finance. The 23 states in the Midwest and Western United States in which we distribute our full range of financial services products-from Ohio to Alaska-are among the fastest growing markets in the world's best economy. Its community banking franchise includes a leading presence in 12 of the nation's 20 fastest growing states: Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. Fifty percent of the projected population growth, the next several years, is expected to come in those states.
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=WFCAs of 12/31/2007 Warren Buffett's BRK had 289,259,868 shares of WFC.My general impression is a fair bargain of about 30-35% in a quality company with good long term prospects.
Portions of this report are generated in budlab software on 08-02-24 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision. I appreciate hearing your views.