Options Trade – Wells Fargo & Co (NYSE:WFC) Calls 
Monday, April 07, 2014

**OPTIONS TRADE: Buy the WFC Jul 2014 50.000 call (WFC140719C00050000) at or under $1.40, good for the day. Place a protective stop limit at $0.55 and a pre-determined sell at $2.60.

by Ian Harvey

April 07, 2014

Introduction

Wells Fargo & Co (NYSE: WFC) will help kick off the earnings season for the financial sector when it reports its first quarter results on April 11. The bank will announce its results before the market opens, and the consensus estimate for the quarter is $0.97 per share. Wells Fargo recently had its 2014 capital plan approved by the Federal Reserve, which gave the stock a boost. WFC is up 103% year to date.

Wells Fargo has enjoyed a steady upwards trend over the last 18 months, not really running into much selling pressure at all during that time. The bank has done a great job coming out of the recession and recently passed another round of stress tests by the Federal Reserve with its capital plans also approved for the current year. As a result, the company plans to boost its quarterly dividend from 30 cents per share to 35 cents and repurchase an additional 350 million shares of stock this year.

Company Details

Wells Fargo & Company is a bank holding company. It has three operating segments: Community Banking, Wholesale Banking and Wealth, and Brokerage and Retirement.

It provides retail, commercial and corporate banking services through banking stores and offices, the Internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia and in other countries.

The Company provides other financial services through subsidiaries engaged in various businesses, principally wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment.

Effective November 21, 2013, Wells Fargo & Co acquired an undisclosed minority interest in Grameen America Inc.

Key Statistics for WFC

Current P/E Ratio (ttm) 12.7404
Estimated P/E(12/2014) 12.2522
Relative P/E vs. SPX 0.7408
Earnings Per Share (USD) (ttm) 3.8900
Est. EPS (USD) (12/2014) 4.0450
Est. PEG Ratio 1.1045
Market Cap (M USD) 260,272.28
Shares Outstanding (M) 5,251.66
30 Day Average Volume 16,599,529
Price/Book (mrq) 1.6932
Price/Sale (ttm) 2.9754
Dividend Indicated Gross Yield 2.82%
Cash Dividend (USD) 0.3500
Dividend Ex-Date
5 Year Dividend Growth -2.04%
Next Earnings Announcement 04/11/2014

Technical Analysis

WFC was recently trading at $49.76, just $0.11 below its 12-month high and $13.57 above its 12-month low. Technical indicators for WFC are bullish and the stock is in a strong upward trend. The stock has support above $48.50 and has broken through recent resistance.

The company has a market capitalization of $261.36 billion.

Earnings

Wells Fargo & Co. last announced its earnings results on Monday, January 13th. The company reported $1.00 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.98 by $0.02. The company had revenue of $20.70 billion for the quarter, compared to the consensus estimate of $20.63 billion.

During the same quarter in the previous year, the company posted $0.91 earnings per share. The company’s revenue for the quarter was down 5.8% on a year-over-year basis. On average, analysts predict that Wells Fargo & Co. will post $4.04 earnings per share for the current fiscal year.

On Friday WFC is expected to report FY 2014 first-quarter EPS of 96 cents on revenue of $20.59 billion, compared with a profit of 92 cents on revenue of $21.56 billion in the year-ago period. Wells Fargo & Co is trading at around $49.73 a share. In the past 12 months, the stock has gained 40.4 percent.

Continued Growth

WFC received favorable news on March 26th from CCAR, as it looks like WFC saw a bigger-than-expected capital return approved of $24 billion, including a 17% dividend increase.

Also, Wells Fargo announced it would be raising its dividend from $0.30 to $0.35, which would bump its dividend yield to almost 3% at today's prices. An interesting fact about that dividend of $0.35 is it's just ahead of the $0.34 Wells Fargo paid in 2008 before it was forced to slash it to $0.05 as a result of the financial crisis.

This is more evidence Wells Fargo has fully recovered from the depths of the recession.

Yet the big news was not the dividend, but instead, the approval of the plan to buyback a staggering 350 million shares. At today's prices, that would be nearly $17.5 billion.

What is perhaps even more striking is the firm notes it still has a remaining 74 million of share repurchases which have been authorized under its last plan, meaning it has nearly $20 billion in available repurchase authorization.

In addition to its dividends, last year Wells Fargo noted it repurchased 124 million of its common stock and in total returned 55%, or $11.4 billion, of its income to shareholders through dividends and buybacks.

At a recent presentation its CFO, Tim Sloan, highlighted the firm hoped to return between 50% and 65% of its income to shareholders. Although it delivered remarkable returns in 2013, this means Wells Fargo believes it had further to go, which is evidenced all the more by its latest request.

It is unlikely Wells Fargo will utilize the entirety of its repurchase authorization in 2014, but its request for such a staggering amount demonstrates that not only does the firm believes its stock is something worth buying at today's prices, but also that it is fully committed to returning the money it earns back into the wallets of shareholders.

Analysts Opinions

Wells Fargo & Co. was upgraded by Atlantic Securities from an “underweight” rating to a “neutral” rating in a research note issued on Monday, March 24th, 2014. The firm currently has a $53.00 price target on the stock, up from their previous price target of $48.00. Atlantic Securities’ price target would indicate a potential upside of 8.01% from the stock’s previous close.

Also, the company has been the subject of a number of research reports:-

• Analysts at Zacks reiterated a “neutral” rating on shares of Wells Fargo & Co. in a research note on Friday, February 28th. They now have a $48.00 price target on the stock.

• Separately, analysts at TheStreet reiterated a “buy” rating on shares of Wells Fargo & Co. in a research note on Wednesday, February 26th.

• Finally, analysts at TheStreet reiterated a “buy” rating on shares of Wells Fargo & Co. in a research note on Friday, February 14th.

Wells Fargo & Co. has been given a consensus rating of “Hold” by the thirty analysts that are covering the stock. One equities research analyst has rated the stock with a sell recommendation, eighteen have issued a hold recommendation, nine have issued a buy recommendation and one has issued a strong buy recommendation on the company. The average 12-month target price among brokers that have issued a report on the stock in the last year is $46.55.

Conclusion

The company announced Wednesday that it reached a new ten year agreement to provide and service credit cards for Dillard's. It is actions like this from the bank that make it one of the best as Dillard's is one of the top department stores around and has some of the nation's top clientele.

Fundamentally, Wells is inexpensive on next year's earnings but expensively valued on the earnings growth potential. Financially, the dividend has been increased by 16% and is well supported by earnings.

The bank is running on all cylinders, and there is little chance of weakness in its upcoming earnings report. The consensus estimate is $0.97, but the rumored number that Wall Street is watching for is $0.98, so that will be the number that counts. Expect a good quarter and the stock to continue its upward trend following the announcement.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the WFC Jul 2014 50.000 call (WFC140719C00050000) at or under $1.40, good for the day. Place a protective stop limit at $0.55 and a pre-determined sell at $2.60.



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