Friday, November 07, 2008

Wells Fargo (NYSE:WFC): FBR reits Underperform, lowers tgt to $20

Friedman Billings Ramsey is reiterating their Underperform rating on Wells Fargo (NYSE:WFC) noting that following its $11 billion capital raise, WFC's tangible common equity to assets ratio is just 3.3%. Given this low level, and their expectation that WFC will have to come back to the market and raise more capital, they reduce their price target to $20 (from $25). Target equals to 2.0x 3Q08 tangible book value.

Why is tangible common equity important? It is the most important measure of a company's capital, as it is in a first loss position, and is a significant driver of a company's share price. If common equity is reduced by losses, book value shrinks and a stock will trade lower, regardless how much preferred equity is outstanding. FBR considers 3.3% tangible equity to assets a level of considerable leverage, particularly when faced with deteriorating credit quality, merger integration risk, economic weakness, and increased regulatory scrutiny. They also reduce 2009 operating EPS estimate to $1.70 (from $2.15), which largely reflects higher provision expense, based on WFC's guidance for approximately one-third of expected losses on Wachovia's loans to occur after the transaction closes. Firm initiates a 2010 operating EPS estimate of $2.65. Wells Fargo is clearly among the best depository franchises in the nation, and its position is only bolstered by its acquisition of Wachovia. While the acquisition makes strategic sense over the long run, they can't get comfortable with its near-term capital position or the shares' premium valuation.

Notablecalls: So now FBR slaps a $20 tgt on WFC. Can the shorts in WFC really have it this easy? I mean everyone was short the name yesterday in anticipation of a low pricing.

I don't think the shorts will wiggle out of this that easy.


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