We expect Wells Fargo & Company WFC to beat earnings expectations when it reports first-quarter 2015 results before the opening bell on Tuesday, Apr 14.
Why a Likely Positive Surprise?
Our proven model shows that Wells Fargo has the right combination of two key ingredients to beat earnings.
Positive Zacks ESP: The Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +3.09%. This is a very meaningful and leading indicator of a likely positive earnings surprise for the company.
Zacks Rank #3 (Hold): Wells Fargo carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Wells Fargo’s Zacks Rank #3 and ESP of +3.09% makes us confident of an earnings beat on Apr 14.
Factors to Influence Q1 Results
According to management, mortgage originations are anticipated to be in line with the fourth quarter 2014 level and gain on sale margin is likely to be within the range of the last four quarters. We believe Wells Fargo’s non interest income is likely to get support from mortgage lending. Notably, U.S. banks witnessed a spur in refinance applications due to the reduced mortgage rates in the quarter.
Wells Fargo –one of the largest mortgage lenders in the nation, might exhibit an improvement in mortgage banking revenue, given such a favorable backdrop.
Continued expense control and balance sheet restoration should act as tailwinds in the quarter. Wells Fargo has implemented company-wide expense management initiatives. According to management, several expenses including equipment expense, which was up in fourth-quarter 2014, will be lower in the first quarter though seasonally higher personnel expenses might be recorded.
However, interest rate spreads are unlikely to support the top line any time soon. A low interest-rate environment would keep its margin under pressure. Further, owing to two lesser number of days in first quarter 2015, net interest margin will perhaps exhibit a downward trend.
Also, a likely increase in overall loan growth might lead to a rise in provision for credit losses, which have been witnessing an increasing trend in the past few quarters.
Activities of Wells Fargo during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 97 cents per share over the last seven days.
Stocks That Warrant a Look
Apart from Wells Fargo, here are some stocks you may want to consider, as our model shows that these also have the right combination of elements to post an earnings beat this quarter:
The earnings ESP for The Goldman Sachs Group, Inc. GS is +3.14% and it carries a Zacks Rank #3. The company is scheduled to release its first-quarter results on Apr 16
JPMorgan Chase & Co. JPM has an earnings ESP of +1.45% and carries a Zacks Rank #3. It is expected to report its first-quarter results on Apr 14.
The earnings ESP for Comerica Incorporated CMA is +1.39% and it carries a Zacks Rank #3. The company is scheduled to release its first-quarter results on Apr 17.
Wells Fargo and JPMorgan with exposure in almost all banking businesses are the first among the banking bigshots to report first-quarter earnings. Therefore, their earnings releases are going to be a significant indicator of the performance of the key banking sector.
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