Barron's Lower WFC price target from $34 to $25

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Wells Fargo • WFC-NYSE
Market Perform • Price 24.20 on Sept. 6
by Keefe, Bruyette & Woods
We are downgrading the shares of Wells Fargo to Market Perform, from Outperform, based on valuation. We are lowering our price target to 25 from 33, and we believe shares are fairly valued at the current price. Our earnings estimates for 2011 remain unchanged, but our 2012 and 2013 estimates decline to $2.75 and $3.05, from $3.50 and $4.05, respectively, largely on a lower margin forecast. [The downgrade is]…based on valuation, as our current one-year, DCF-based price target of 25 implies less than 1% total return after dividends are considered. While we believe that credit will continue to improve and Wells will meet its expense-saving goals, we also believe that the current rate environment will continue as well, and the reinvestment risk associated with Wells' securities and loan book is too great to ignore. WFC has the highest securities yield (5.18%) among the large-cap bank group…[versus] the median (3.27%) as of 2Q11. Given the above-peer yield, in our view, Wells has a fair amount of potential earnings at risk as securities prepay (or mature) and are reinvested. Roughly 15% of Wells' debt securities are expected to reprice or mature within a year, and the remaining percentage could be subject to higher prepayments, since the majority are mortgage-backed securities. Market cap: $126.3 billion.