Wells Fargo May Prove Warren Buffett Right Again

Warren Buffett
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Warren Buffett

When Wells Fargo reports first-quarter earnings later in April it may resolve a lingering question about Warren Buffett’s bank investing strategy: Has “Oracle of Omaha” put his money behind America's most profitable bank?

Expectations are for Wells Fargo to possibly unseat JPMorgan Chase as the most profitable U.S. bank by year end and solidify Buffett’s next bank investing coup.

Going into first-quarter earnings, investors are expecting big results out of Wells Fargo , after its record fourth-quarter earnings outperformed rivals. The San Francisco-based bank saw its earnings grow nearly 30 percent in 2011, significantly beating the sub-10-percent earnings growth of competitors like JPMorgan and Citigroup, while Bank of America swung from a 2010 loss to a moderate profit.

Wells Fargo is expected to earn $3.9 billion in first-quarter profits on $20.3 billion in revenue, according to consensus estimates compiled by Bloomberg. For 2012, the nation’s fourth-largest bank by assets expected to post a record $17.5 billion profit on $81.3 billion in revenue, which would put it in contest with the $18.5 billion in profit that JPMorgan is expected to earn.

While the profit gap with JPMorgan is expected to narrow next year, don’t count Wells Fargo out in 2012. Momentum is on its side.

Wells Fargo shareholders, led by Buffett and his 7.28 percent share stake, have benefitted from the bank’s faster growth expectations. In the past 12 months, Wells Fargo is the only “big four” bank to post share price gains, even after a 2012 financial-sector share rally that’s added more than 20 percent to the KBW Bank Index. Since this time last year, Wells Fargo shares are up more than 7 percent, while JPMorgan is just in the red, and Citigroup and Bank of America continue to show deep losses from a 40-percent-plus 2011 share crash.

After stress tests results were reported by the U.S. Federal Reserve earlier in March, Wells Fargo led one of the most ambitious capital return and buyback programs, boosting its dividend by 83 percent and adding billions in share buybacks.

Starting in 2012, Buffett and other Wells Fargo investors could see a an annual rate of dividend growth near 18 percent driven by the company’s improving profitability, according to Richard Staite of Atlantic Equities.

In first-quarter earnings, Wells Fargo is expected to show both revenue growth and cost reductions, which could keep quarterly profits near record levels of roughly $4 billion. Wells Fargo also has the largest portion of its revenue tilted to the U.S. housing and mortgage lending market of any large U.S. bank, which could recover alongside the broader economy. The bank has a near 30 percent market share in mortgage origination that’s likely to help its community banking division add to fourth quarter and annual growth in 2011.

“We see the bank benefiting from a recovery in the U.S. economy and housing market,” writes Staite in a March 23 note raising his price target on shares to $40 from $38, while maintaining an “outperform” rating.

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