Buy Wells Fargo on potential for big boost from tax reform, Bernstein says
- Bernstein raises its rating for Wells Fargo shares to outperform from market perform, predicting a big boost to the bank's earnings from tax reform.
- The firm's analyst estimates the Republican corporate tax cut will increase Wells Fargo's earnings-per-share by 15 percent.
After working through the lingering effects of a fake account scandal, Wells Fargo will thrive in the coming years, according to one Wall Street firm.
Bernstein raised its rating for the bank's shares to outperform from market perform, predicting a big boost to Wells Fargo's earnings from tax reform. The bank could have a $2.5 billion gain in the fourth quarter 2017 because of adjustments for the tax cuts, partially offset by taxes on profits returned from overseas, Bernstein noted. Earnings per share could get a 15 percent boost, the firm said.
Wells Fargo suffered from multiple sales-related scandals in its consumer operations in recent years, including the discovery that millions of customers were enrolled in programs without their consent or knowledge by employees trying to meet aggressive sales goals.
"We believe Wells Fargo is gradually moving past its sales practices issues and associated revenue deceleration, and has opportunities to improve its returns and earnings trajectory through a combination of increased capital distributions and expense savings," analyst John McDonald wrote in a note to clients Wednesday. "We believe Wells Fargo will be a meaningful beneficiary of tax reform."
Wells Fargo underperformed the market in 2017. Its shares rose 10 percent while the S&P 500 gained 19 percent. The bank's stock rose nearly 1 percent Wednesday.
McDonald raised his price target for Wells Fargo shares to $69 from $64. The new target is 13 percent higher than Tuesday's closing price.
Better expense controls should be a boost to the shares in the next couple of years, the analyst said. "A meaningful step up in capital returns in 2018/2019 and expense savings realization in 2019/2020 can provide a lift" to future EPS, he wrote.