Wells Fargo (WFC) Stock Could Be 27% Undervalued Following Interest Rate Warning

Wells Fargo has delivered a very strong 3 year run, yet several valuation checks still point to the shares trading below an estimate of intrinsic value based on an Excess Returns model and market multiples. For anyone watching big banks, this mix of robust past gains and continued upside signal from the models raises a fair question about how much upside is already in the price.

• The stock has returned 123.5% over the past 3 years, which puts recent strength front and center for anyone considering new capital today.
• Signals from bank preferred securities, which suggest investors expect interest rates to stay elevated, can support Wells Fargo's net interest income but also keep funding and credit costs as a live risk for the valuation.
• On a broad screen of checks, Wells Fargo comes out with a mixed picture, with a 4 out of 6 value score that leans toward the shares still being reasonably priced rather than clearly expensive.

The issue now is whether Wells Fargo's current share price already reflects that Excess Returns intrinsic value estimate or still leaves a meaningful margin between market price and underlying worth.

Spot opportunities beyond Wells Fargo by scanning a curated list of bank and financial stocks that currently screen as resilient on price and balance sheet strength in our 11 resilient stocks with low risk scores.

Does Wells Fargo Look Undervalued on Excess Returns?

The Excess Returns framework evaluates how much profit Wells Fargo can earn above its required cost of equity on each dollar of shareholder capital. For a large bank, this is essentially a test of how efficiently it can use its balance sheet over time.

For Wells Fargo, the model uses a Book Value of $54.43 per share and a Stable EPS of $8.29 per share, based on future return on equity estimates from 17 analysts. With an Average Return on Equity of 13.47% and a Cost of Equity of $5.29 per share, the Excess Return is calculated at $3.00 per share, and the Stable Book Value is projected at $61.55 per share. These inputs produce an Excess Returns intrinsic value estimate of $122.76 per share. Compared with the current market price, this estimate suggests the stock appears 27.1% undervalued on this framework.

Weakness in Wells Fargo preferreds that points to sticky interest rates helps explain why the market still prices the common equity below this Excess Returns estimate.

On this model, Wells Fargo stock currently appears undervalued relative to the earnings power implied by its balance sheet and return profile.

Our Excess Returns analysis suggests Wells Fargo is undervalued by 27.1%. Track this in your watchlist or portfolio, or discover 33 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Wells Fargo.

Does Wells Fargo Look Undervalued on Earnings?

The P/E ratio is a straightforward way to assess what you are paying today for each dollar of Wells Fargo earnings. For a mature bank with an established profit base, it is often the first shortcut investors use.

Wells Fargo trades on a P/E of 12.5x, which sits slightly below the broader banks industry on 11.9x and under the peer group average of 13.4x. The fair P/E implied by the model is 14.6x, so the current multiple comes in meaningfully lower than the level suggested by the company’s size, risk profile and analyst earnings mix.

This spread means the stock is not priced at a premium to either its direct competitors or the tailored fair multiple. For readers comparing large banks, that leaves room for the P/E to converge toward that fair ratio anchor if the market moves in that direction.

On the P/E test, Wells Fargo appears undervalued relative to both its banking peers and the modelled fair earnings multiple.

See what the numbers say about this price — find out in our valuation breakdown.

The Wells Fargo Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Wells Fargo pick up where the valuation gap above leaves you by explaining which combinations of future growth, margins and earnings would need to hold for the stock to be worth materially more or materially less than today’s quote. Each scenario ties its number to a clear view on how Wells Fargo's growth, profitability and risk profile might evolve, and gives you a reference point you can revisit when fresh information arrives.

You can add your voice to the Simply Wall St community by publishing a number driven Narrative on Wells Fargo that sets out your view on how the recent signal from bank preferred shares and the interest rate outlook filters through to the valuation.

Lay out your assumptions, relate them to the current share price, and then track how that thesis holds up as Wells Fargo's results and interest rate expectations evolve.

Do you think there's more to the story for Wells Fargo? Head over to our Community to see what others are saying!

The Bottom Line

Wells Fargo screens as undervalued on both the Excess Returns intrinsic value estimate and the P/E comparison, so the valuation work points in the same direction rather than sending mixed messages. The open question is whether that gap closes through the share price moving up, the intrinsic value view being too optimistic, or the earnings multiple staying subdued. What matters most from here is whether the bank can sustain the profitability and risk profile implied in the Excess Returns model without funding or credit costs eroding that thesis.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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