The Wells Fargo Company (WFC): An Evaluation

 The Wells Fargo Company (WFC): An Evaluation

More than 23 million people rely on the wide range of financial services offered by Wells Fargo & Company (WFC), a massive Western and Midwestern bank. More than 150,000 individuals work for the firm at any one of its more than 6,000 sites around the country. Wells Fargo's asset value is close to $500 billion.

The corporation does more than just take deposits and give money out; interest income still accounts for over half of its earnings, or around $26 billion. Among Wells Fargo's many activities are investment banking, asset management, and brokerage services. Venture capital investments are also made by the company.

Returns on assets for Wells Fargo have averaged 1.57% and return on equity for the last decade to be 18.19%.

The place

The majority of investors link Wells Fargo with California. Presently, the business serves customers in no less than 23 states. Nevertheless, California continues to have a disproportionate share.

Wells Fargo's overall loan portfolio includes about 14% mortgage loans in California. The remaining 5% of the company's total loans are for commercial real estate in California. When it comes to overall loans, no other state comes close. Not a single state has more than 2% of Wells Fargo's total loans going toward mortgages or commercial real estate.

Sales Promotion

It is widely known that Wells Fargo prioritizes cross-selling. At now, each customer has four goods with Wells Fargo; the company's stated goal is to double that number to eight products for both consumers and businesses.

Increasing consumer stickiness is the goal of cross-selling. By reducing expenses in relation to revenues, it also aids in increasing profitability. A big physical presence and a huge number of bankers are no longer necessary. Alternatively, the same consumers might generate more revenue with the current infrastructure.

Richard Kovacevich, Chairman and Chief Executive Officer of Wells Fargo, discusses the significance of cross-selling in the "Vision & Values" section of the company's website:

"Cross-selling," often known as "needs-based" selling, is our primary aim. Why? Reason being, it's a model for "increasing returns" in business. It's quite similar to the "network effect" in online shopping. It increases possibilities by a factor of three. Customers can be better understood the more you sell to them. Your ability to sell them additional things increases as your knowledge of them grows. Customers get better value and are more loyal when they have more products with you. There will be more chances to satisfy their financial wants the longer they remain with you. Since the additional expense of selling a product to an existing client is often only around ten percent of the cost of selling the same product to a new customer, the profit margin grows as sales volume increases. This gives us a substantial cost advantage as an aggregator compared to companies who focus on only one product or channel. Like other aggregators like Wal-Mart for general retail, Home Depot for home improvement products, and Staples for office supplies, cross-selling reinvents the way financial services are aggregated and marketed to customers.

Mr. Kovacevich's excitement about the cross-selling strategy is quite reasonable. You can't put a price on satisfying your clients' diverse demands as you can't put a price on the chances you lost out on. But it's evident that any organization, not just a bank, can boost its long-term profitability by diminishing each customer's interest in examining a competitor's services.

Continuing in the same portion of the website, Mr. Kovacevich goes on to stress the significance of customer stickiness:

Among the sales metrics relating to customers, cross-selling is the most crucial to us. We aspire to acquire the full patronage of our clients. Customers are more loyal, get better deals, and stay with Wells Fargo longer when they have more goods with the company, which improves retention. Increasing sales to current clients accounts for 80% of our revenue increase.

Wells Fargo's long-term strategy to sustain above-average returns on assets and equity includes a strong emphasis on retention. The key to extraordinary profitability is finding a way to set your product or service apart from the competition. Enhancing customer loyalty and decreasing the likelihood of "comparison shopping" are crucial for sustaining exceptional profitability.

Because their product is intrinsically valuable to consumers, certain companies enjoy very favorable economic conditions. Market share is the bane of most companies' existence. However, how many people actually fact consider "mind share"? People are bound to have a pleasant mental image of a product like Snickers, Coke, or Hershey.

When considering other options for spending money, these things will likely be toward the top of many customers' lists. The most glaring example of a company that has a healthy mind share but no pleasant association is GEICO. "Auto insurance" is the only thing that comes to mind when you hear this company's name. Naturally, that's all the GEICO name needs to accomplish.

Now tell me how this relates to Wells Fargo. Advertising isn't the only factor that contributes to mind share. Indeed, in the majority of instances, the type of outcomes that are produced by direct, differentiated experiences cannot be replicated through exposure to advertising. When it comes to market share, entertainment properties are way out in front. Those who enjoyed Star Wars will never forget it. Not only do they recall the movie, but they mentally store it (or, more accurately, allude to it) in a myriad of ways.

This example in particular has a mountain of evidence supporting it. Innumerable works of different media make reference to Star Wars. Everything from the name to the music to the opening text is instantly recognizable. Although they came out decades after the original, even the Star Wars sequels that fans despised grossed more than any other film in cinematic history. The kind of enduring popularity that any company should strive for if it wants to keep making record-breaking profits is, of course, what Star Wars has.

No matter how well-run a company is, it will be unable to achieve this level of market share. Their offerings will never be able to compete with the uniqueness and staying power of a Hollywood blockbuster. Equally crucial is the fact that the product or service does not possess any intrinsic qualities that would allow it to evoke favorable associations. In the world of finance, this is obviously the case.

What, therefore, can a financial services firm do to increase its market share? To "wow" its consumers is the simplest and most apparent strategy. The chief executive officer of Wells Fargo even addresses this specific choice in the "Vision and Values" area of the business website:

We need to impress them. Being customers ourselves, we understand how that feels. It happens every time we visit the grocery store, the cleaners, a restaurant, or some other establishment: we're 'wowed!' The staff genuinely paid attention to us and assisted us in obtaining what we needed, so we leave feeling satisfied. The story of the customer who stands in line at the grocery store just because the person who bags their groceries has a knack for connecting with them on a personal level—smiling, knowing their names, and inquiring about their families' well-being is one that everyone has heard. Customers should be able to remark, "That was great" after interacting with any of our personal bankers, whether in-store, over the phone, or online at wellsfargo.com. I need to inform someone right now.

Extending the customer's mental associations is another viable choice. As opposed to relationships developed in more strongly branded organizations, those in the financial services industry are more likely to be self-aware, structured in hierarchies, and categorized. The (possible) buyer typically conceptualizes a "set" before considering an individual "element" inside that set. The data can go both ways, just like many mental associations. For instance, when asked to think of "banks," the client could ordinarily think of "Wells Fargo," but they can also say "bank" when asked to do so. Classification plays a significant role in allowing Wells Fargo to extend its market share across different service categories, although to a limited extent.

Simply put, offering a wide variety of financial services makes sense from both the provider's and the user's points of view. This is due to the fact that the user has likely already formed a loose mental category for all things related to financial services, such as deposits, borrowing, credit cards, insurance, brokerage services, asset management, etc. Customers' inclination to pay for supplementary services, which may not be identical, is significantly impacted by a single favorable encounter with Wells Fargo due to this mental network.

Here, trust in the consistency of service quality, a pleasant experience, and a more expansive understanding of what Wells Fargo is (a business that does "money things" beyond simply banking) are the three most important factors. The last criterion is the simplest to fulfill, since it is reasonable for a client to believe that the excellent experience was not an accident, just as a customer would not blame a restaurant's excellent food on his own menu selection. The customer typically thinks the establishment serves better food overall. The same holds true for Wells Fargo; if you have a positive experience with one of their products or services, you will most likely be satisfied with all of them.

Valuation

Wells Fargo stock currently has a yield of little over 3%. The stock is trading at a price-to-earnings ratio below 15 and a price-to-book ratio slightly under 2.75.

In summary

Compared to the S&P 500, Wells Fargo & Company stockholders have done better over the past 5, 10, 15, and 20 years. Total return for WFC over the last decade was 17% as of the end of last year, while the S&P had returned 9%. With a 21% gain compared to 12% for the S&P 500 over the past 20 years, WFC clearly came out on top.

When it comes to investors, Wells Fargo is absolutely second to none. Only one firm among all U.S. banks has achieved Moody's highest credit rating. There is a famous large shareholder at Wells Fargo as well. Berkshire Hathaway is the biggest shareholder in the company. Wells Fargo holds approximately 5.5% of the stock in Warren Buffett's holding company. This year's first quarter saw Berkshire's most recent reported acquisition.

The stated goal of Wells Fargo is to increase earnings and revenue by double digits while maintaining a return on assets of more than 1.75% and a return on equity of more than 20%. Those are two lofty objectives. Compared to other large U.S. banks, the company's return on assets and equity is among the greatest. In any case, for Wells Fargo to reach its objectives, the proportion of its income coming from fee businesses will likely have to rise.

The corporation may diversify its financial services offerings in the next years. Actually, I anticipate that will be the case. The dedication to cross-selling by the organization is here to stay. Wells Fargo's image among investors will shift as a result of this pledge. Very soon, it might be seen as something other than a bank.

The chief executive officer of Wells Fargo argues that the P/E ratio of his firm is excessively low. Profitability and rapid expansion are hallmarks of Wells Fargo's past. Therefore, why should it be valued at the same level as the majority of banks? It seems like it should have received a multiple more befitting a rising company.

Actually, this argument has a few valid points. There has never been a bank like Wells Fargo. Many times, banks that appear to have a sure bet of producing high returns on equity and assets for the foreseeable future are actually not in the best position to expand in the future. These financial institutions tend to be more localized and smaller than their rivals. The bank's niche is very profitable, but any acquisitions would reduce that profitability.

As one might expect, the banking industry is rife with consolidators. Unlike Wells Fargo, several of these financial institutions have never before generated returns on equity and assets on par with what the bank has done. Most crucially, these national banking industry behemoths are almost indistinguishable from their national counterparts. Their moats are thus rather dubious.

A unique kind of bank exists in Wells Fargo. It has a track record of phenomenal expansion and financial success. Expansion into new geographic areas and cross-selling are two clear ways to increase sales in the future. Obviously, the second opportunity is the one I'm most fond of. Neither a westward expansion nor an acquisition fraught with peril is required.

The Wells Fargo franchise is highly valuable and has a lot of potential for expansion. The financial services sector has that benefit, among others. Limits to growth are practically non-existent when using the correct model. Even in other very lucrative fields, it can be difficult to find a place to put fresh money that yields a comparable rate of return.

If growth stocks exist, Wells Fargo is one unusual kind. Perhaps it was that aspect of the business that initially drew Buffett to it. This company has a solid franchise model that has the potential for sustained growth. First and foremost, being a bank automatically makes it a growing corporation that trades at multiples of its intrinsic worth.

You can buy Wells Fargo shares once and then put them aside at the present price. Even if the company fails, the valuation is still too high to guarantee a healthy profit. Having a low P/E ratio as a safety net is unnecessary, though, because the company is not particularly shady. On occasion, the margin of safety is growth that is very close to certain.

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