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Published: July 19, 2010
70 million represents a lot of people for a
country, much less for a bank's customers. It's nearly a quarter
of the United States' population. In fact, you could add every
person in California and Texas together and still not reach the
70 million mark.
And that massive amount of customers doesn't come to a bank by
accident.
No, one bank has developed a winning strategy that it's used to
not only win a customer's business, but keep them around for the
long term. This strategy has proven so successful that the bank
I'm about to tell you about now serves more households than any
of its competitors.
Of course, you'd expect this sort of successful strategy to show
up in a company's share price; once again, this company hasn't
disappointed patient investors.
Despite being a major bank caught in the credit crisis, the
shares have rebounded more than +200% from their 2009 lows.
Today, they still trade where they were before this crisis
began... but there's a big difference between then and now that
could drive the stock even higher.
During the crisis, this company made a major acquisition, and
it's now in the process of rolling out its proven strategy to a
whole new group of customers.
Wells Fargo's (NYSE: WFC) strategy is actually pretty
straightforward. It strives to cross-sell its customer base
multiple products, be it checking or savings accounts, home
mortgages, student loans, brokerage services or credit cards.
That approach has led to high levels of client retention and is
a major reason Wells boasts such a large customer count in the
United States. In terms of
market share, Wells is number one or two in dozens of
product categories.
But remember that near the apex of the credit crunch, the bank
took over struggling Wachovia and its 15 million customers. Not
only did the acquisition give the bank a larger footprint
(especially on the East Coast), but it also represents a larger
base to cross-sell. The company estimates it can cross-sell
current Wachovia customers on 30% more products to bring them in
line with the average Wells Fargo customer.
And with a laser focus on cross-selling,
Wells Fargo doesn't have much need for certain activities that
other banks pursue. This includes investment banking segments
and proprietary trading desks, which can be fantastically
profitable, but extremely volatile.
Wells recently estimated its trading assets are just 10% that of
JPMorgan Chase (NYSE: JPM). They're in the low teens of
other leading investment and retail banks.
Large banks with these business units are being targeted by
politicians in current financial reform legislation, which means
their profit potential could be seriously dented. But Wells
doesn't have this problem.
Overall, the bank made it through the apex of the credit crisis
in enviable fashion. It remained profitable on an annual basis,
due primarily to the factors cited above, although
return on equity (ROE) did dip below 10%.
Return on equity should eventually return to at least 15% as the
economy recovers and the Wachovia customer base grows more
profitable over time. A mid-teens ROE translates into about
$3.33 per share in earnings, which should be achievable in the
next couple of years.
Applying a conservative
P/E multiple of 12 (the P/E is currently 16) leads to a
stock price of $40 per share, or approximately +50% above
current levels.
Action to Take --> The
recent credit crunch will obviously make it very difficult for
Wells Fargo to return to pre-crisis growth and profit levels,
but there is ample room for improvement from where its
operations stand right now. Its simple business focus makes it
the safest and potentially most undervalued bank in America
today.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
