Wells Fargo (WFC) Stock May Be 32% Undervalued As NIM Outlook Improves

Wells Fargo has delivered a strong share price gain over the past few years, which puts fresh focus on whether the current valuation still lines up with the returns it earns on its capital. With mixed short term moves and ongoing headlines around risk management and the broader banking sector, the question for investors is how much of the bank's return profile is already reflected in today's price.

• Over the past 3 years, Wells Fargo has returned about 125% including share price and dividends, which puts more pressure on the underlying returns on capital to support that kind of performance.
• Management commentary around net interest margin running ahead of earlier expectations can support the view that Wells Fargo's interest earning assets may generate stronger profitability on the capital already deployed.
• Prefer to judge Wells Fargo on earnings? See what Wells Fargo's 11.6x P/E says about the price.

The issue now is whether the returns Wells Fargo earns on its capital are strong and resilient enough to justify where the stock trades today.

If you are asking whether Wells Fargo's 3 year, 125% total return still lines up with the returns it earns on its capital, a focused stock screen is a useful second reference point via 32 high quality undervalued stocks.

Is Wells Fargo Still Cheap on Excess Returns?

The Excess Returns model looks at how much profit Wells Fargo earns above the return that equity investors typically require. On the current inputs, the bank is assumed to generate stable earnings of $8.34 per share on a book value base of $54.43 per share, which implies an average return on equity of 13.54%. With a cost of equity of $5.36 per share, that leaves an estimated excess return of $2.98 per share that the model treats as value created beyond the required hurdle rate.

Those economics feed into a higher stable book value assumption of $61.56 per share, which reflects analyst expectations for balance sheet growth rather than any aggressive margin forecast. Despite prediction market bets around large bank failures attracting FDIC scrutiny, the Excess Returns output still places Wells Fargo's estimated intrinsic value substantially above the current share price of $82.97. Find out what Wells Fargo could be worth using our Excess Returns estimate.

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

Simply Wall St Narratives pick up where the Wells Fargo valuation puzzle leaves off. They spell out which paths for growth, profitability and earnings would need to play out for the stock to be worth meaningfully more or less than today's market price on the Community page. Each scenario links its number to a clear view on how Wells Fargo's revenue mix, cost base and key risks might evolve, which you can test again as fresh results and disclosures come through.

One of the top community narratives on Wells Fargo: 17% undervalued

"The current valuation suggests the market may not be fully incorporating Wells Fargo’s recent return on tangible common equity levels..."

Discover why this Narrative puts Wells Fargo at 17% undervalued.

Before you lean on Wells Fargo’s valuation, there is one more angle to check

Valuation only tells part of the Wells Fargo story, because the research also flags specific risk checks that could change how you weigh everything you have just read. Take a closer look at 1 warning sign before settling on a valuation.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com