On Tuesday, we raised the target price of Wells Fargo & Company (WFC) to $30.00 from $29.00 after the company posted strong fourth-quarter results, paving the way for an optimistic 2010 ahead. The company’s fourth-quarter earnings came in significantly ahead of the Zacks Consensus Estimate, aided by strong growth in revenue and deposits, though offset by higher credit losses.

Wells Fargo has a diverse geographic and business mix that enables it to sustain consistent earnings growth, while its strong consumer franchise allows it to offer a vast range of products to households. Further, the Wachovia merger (in December 2008) is expected to generate an internal rate of return (IRR) of about 20% and be accretive to earnings starting from the third year, without any adjustments. This has been a driving force behind its growth in recent years. Wells Fargo is on track to achieve $5 billion in annual merger-related expense savings, which will be fully realized upon completion of the integration by 2011.

Estimate Revision Trend

Over the last 30 days, two of the 21 analysts covering the stock have lowered estimates for the first quarter of 2010, with no upward revisions. Currently, the Zacks Consensus Estimate for the first quarter is operating earnings of 40 cents per share, which would be down 32.9% from the year-ago quarter.

The absence of upward estimate revisions for the first quarter indicates a likelihood of downward pressure on the performance of the stock in the near term. However, the Zacks Consensus Estimate for the year 2010 is operating earnings of $1.90 per share, which would be up by 5% from 2009. The appreciation justifies the positive growth outlook for the stock by the end of 2010 and ahead.

With respect to earnings surprises, the stock has been steady over the last four quarters, as all four of them were positive surprises. The average was 52.3%. This implies that Wells Fargo has surpassed the Zacks Consensus Estimate by 52.3% over that period.

The downside potential for the first-quarter estimate, essentially a proxy for future earnings surprises, currently stands at 5%, reflecting a slightly cautious outlook given the company’s weak credit quality. Wells Fargo shares currently trade at 14.3X our 2010 earnings estimate of $2.02 per share, a 10% discount to the 15.9X industry average. On a price-to-book basis, shares currently trade at 1.4X its fourth quarter 2009 book value of $20.03 per share, at a 17% premium to the 1.2X industry average. This looks attractive, given a trailing 12-month ROE of 13.6%, which is way above the 3.9% industry average.

Our six-month target price of $30.00 per share equates to about 14.9X our earnings estimate for 2010. Combined with the $0.20 per share annual dividend, this price target implies an expected 4.2% return over that period. This is consistent with our long-term Neutral recommendation.

Wells Fargo’s ongoing focus on producing high risk-adjusted returns helps it to maintain strong capital ratios. Its absolute and relative liquidity positions it above its peers to take advantage of opportunities arising from the changing market environment. Moreover, the timely exit from Troubled Asset Relief Program (TARP) has helped the company save the annual preferred stock dividend payment of $1.25 billion to the government. This is expected to be slightly accretive to earnings in 2010.

The Wachovia merger has transformed Wells Fargo into the fourth-largest bank in the country with an impressive geographic diversification and a sturdy balance sheet, behind Bank of America Corp. (BAC), JPMorgan & Chase Co. (JPM) and Citigroup Inc. (C). Although there is a lot of uncertainty regarding the commercial sector – especially due to the credit crunch, regulatory and fiscal policy issues in the near term – we believe that Wells Fargo’s profitability ratios, cross selling ability, strategic Wachovia cost integration and diverse business portfolio (along with better-than expected growth in investment banking) will drive long-term growth and add to the investors’ confidence.

Read the full analyst report on “WFC”
Read the full analyst report on “BAC”
Read the full analyst report on “JPM”
Read the full analyst report on “C”
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