Student Research Leah Hauserman This report is published for educational purposes only.

Important disclosures appear at the back of this report

Ticker: WFC Recommendation: BUY

Price: $52.82 Price Target: $59.89

Earnings/Share

Mar. Jun. Sept. Dec. Year P/E

Ratio 2014A $1.05 $1.01 $1.02 $1.02 $4.10 10.84x

2015A 1.04 1.03 1.05 1.00 4.12 11.14

2016A/E 0.99 1.01 1.03 1.02 4.05 12.35*

2017E 0.96 1.02 1.04 1.05 4.07 12.29*

*P/E ratio calculated off of projected earnings per share and price target.

Highlights

Earnings Higher than Expected: Despite the fraudulent accounts scandal that Wells Fargo is

facing, the company reported a third quarter revenue for 2016 of $22.3 billion. This number is up

2% from last year, and is 36 basis points (bps) higher than analysts had expected.

Expected Increase in Interest Rates: It is expected that the Federal Reserve will increase interest

rates in December 2016. The current estimate for the rate hike is 60 bps up from the current risk-

free rate of 1.74%.

Wells Fargo Facing Repercussions Following Scandal: In early September, information was

leaked that Wells Fargo employees had been creating accounts and applying for credit cards

without customers’ knowledge for over 4 years. Wells Fargo was fined a total of $185 million by

the Consumer Financial Protection Bureau, the Los Angeles City Attorney, and the Office of the

Comptroller of Currency. The bank is also banned from underwriting the sales of California bonds.

Former CEO John Stumpf stepped down from his position and was replaced by Tim Sloan, who

said in a public statement that he does not think that the scandal will affect the company’s financial

performance.

Market Profile

52 Week Price Range $43.55-56.34

Average Daily Volume 24.5 M

Beta 0.79

Dividend Yield (Estimated) 2.97%

Shares Outstanding 5.02 B

Market Capitalization 233.3 B

Institutional Holdings 77.50%

Insider Holdings 0.10%

Book Value per Share 35.84

Debt/Equity 17%

Return on Equity 33.37%

Date: 11/18/16

[Industry: Financials – Global Banks]

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

2

Investment Summary

Growth in Earnings

On Wells Fargo’s most recent earnings statement, the company reported that its revenue for the third quarter

was $22.3 million and net income was $5.64 million. Revenue increased by 36 basis points from the second

quarter, and profitability increased, as its net income was 144 basis points higher. Analysts had expected

revenue in the third quarter to be unchanged from the previous quarter, at $22.2 billion. Therefore, revenue

for the third quarter was 36 basis points higher than analysts had anticipated. Increased expenses, including

those due to increased operating losses, legal settlements after the accounts scandal, higher salaries, increased

donations to the Wells Fargo Foundation, and higher FDIC insurance expense, were offset by an increase in

income related to strong mortgage banking results, increased fee revenue, and growth in investment

securities, loans, and trading assets. Despite the accounts scandal, there are 4.7% more primary consumer

checking customers than in September of last year.

Loan & Deposit Growth

Since Wells Fargo conducts most of its operations within the United States and does not offer some of the

advanced financial products as its competitors, loans are an increasingly important factor in Wells Fargo’s

business. Mortgage banking and retail banking are the two largest components of Wells Fargo’s revenue,

currently making up 42.7% of its 2016 gross income. Analysts and industry professionals have focused on the

potential for the scandal to hurt retail banking if consumers lose trust in Wells Fargo. However, there is also a

risk that it may cause Wells Fargo’s commercial customers to sever their ties with the bank, as well as ward

off prospective clients. Both of these potential consequences are a major concern to Wells Fargo, but even

during the height of the scandal, WFC continued to make loans, and the company actually saw positive loan

growth for the third quarter of 2016. Total average loans amounted to $957.5 billion, up 7% from the third

quarter of 2015. Total average deposits are $1.3 trillion, representing a 5% increase from September 2015.

Interest Rate Hike

The Federal Reserve met once again in November and strongly implied that rates will be increased in

December. Rising interest rates tend to have a positive impact on bank stocks, as they profit from the

increased spread on deposit accounts and the increased return on lending. Although the Fed is a separate

entity from the government, President-elect Donald Trump says that he will try to use his power in office to

increase the interest rate if the Fed fails to do so.

Valuation

Dividend Discount Model

This model uses the projected dividend growth rate, the dividend per share, and the required rate of return.

The 7-year compound dividend growth rate is 17.5%. Following the financial crisis, Wells Fargo dropped its

annual dividends from a high of $1.30 in 2008 to $0.20 per share in 2010. Today, dividends have recovered

and even grown beyond pre-recession levels, reaching $1.35 in 2015 and $1.52 per share in 2016. Because

dividends have recovered from the crisis, I estimate that dividends will grow 13% for one year, then will slow

down to 10% for two years, and then will continue to grow at the sustainable historical rate of 7.2%. I

calculated the required rate of return to be 10.14% using the CAPM model. After inputting these values into

the dividend discount model, I found a fair value of $61.39, indicating that WFC is undervalued by 16.73%.

Capital Asset Pricing Model

The required rate of return was calculated from the risk-free rate of 2.23%, the 10-year treasury rate. Google

Finance identified WFC’s beta as 0.93, and the market risk premium is 8.5%. The required rate of return for

WFC is 10.14%.

Holts Model

This model compares WFC’s P/E ratio to its growth rate to the average P/E ratio and P/E growth rate of its

competitors. I believe it is important to consider an earnings-based model and compare Wells Fargo to other

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Stetson University: Investments

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3

major banks because of the recent scandal that Wells Fargo is dealing with and because WFC generated

higher-than-expected earnings last quarter. I used WFC’s dividend yield of 2.97%, and its 5-year average

growth rate of 11.22%. I averaged the dividend yields and the average 5-year growth rates of Wells Fargo’s

three main competitors: Bank of America, JPMorgan Chase, and Citigroup. I calculated an industry average

dividend yield of 1.46% and a sustainable industry growth rate of 7.33%. With these inputs, I estimate a fair

price of $58.39, an 11% undervaluation.

Average Fair Value

An overall fair price of $59.89 was concluded by averaging the fair price of the two models. These models

determine that Wells Fargo shares are currently 13.89% undervalued.

Analyst Opinions

Many analysts still maintain a positive outlook for WFC stock. Although the majority of analysts maintain a

“strong buy” or “buy” recommendation, there is still a range of prices at which Wells Fargo is valued.

Nasdaq’s analysts estimated Wells Fargo stock to be worth $59 per share, while CNN valued it at $50 per

share. Analysts for the Financial Times have a median estimate of $48 per share, with a high of $64 per share

and a low of $41 per share. Although the median is below my estimated fair price, many analysts still have a

“buy” recommendation because they estimate that there will be a temporary dip, but the stock’s price will rise

again in the future. Analysts who believe that the stock is undervalued often cite the fact that the company’s

scandal, and not a fundamental problem with the firm or its financials, is the cause of the currently falling

stock price. Because they expect the resulting bad publicity to be a temporary woe, they believe that Wells

Fargo’s stock price is currently below what it is actually worth, and will eventually rise to meet their

valuation price once the negative publicity from the scandal is alleviated.

Risks to Price Target

Risks that could affect the target price include uncertainty and volatility in markets due to the recent election

result, an economic slowdown due to the Fed’s plan to raise interest rates, smaller loan and accounts growth,

a lower public opinion of the company due to negative publicity following the scandal, and the potential for

oil prices to increase.

Business Description

Traded on the New York Stock Exchange, Wells Fargo is a U.S.-based financial services company that offers

retail, corporate, and commercial banking services to individuals, businesses, and institutions. It conducts its

operations mainly through banking offices and its online website. Wells Fargo provides a wide variety of

financial products and services.

Wells Fargo conducts operations through three main business segments:

Community Banking: This is the segment that the “typical consumer” would have the most interaction

with. Offers financial

products and services to

household consumers and

small businesses. The

products include checking

and savings accounts, credit

and debit card accounts,

and auto, student,

mortgage, home equity, and

small business loans. Its

services in this segment

include investment,

insurance, and trust

services. This segment only

operates within the United

States and the District of

Columbia.

Wholesale Banking: Works

with businesses both domestically and internationally. Products include business banking, middle

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Stetson University: Investments

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market commercial banking, government and institutional banking, corporate banking, commercial

real estate, treasury management, Wells Fargo capital finance, insurance, real estate capital markets,

commercial mortgage lending, corporate trust, equipment finance, securities, principal investments,

and asset-backed finance. This segment is dedicated to offering financial solutions to businesses and

governments everywhere.

Wealth and Investment Management: Provides a variety of individually-tailored wealth

management, investment, and retirement products to U.S.-based clients. The business units within this

segment that offer these products include Wells Fargo Advisors, The Private Bank, Abbot Downing,

Wells Fargo Institutional Retirement and Trust, and Wells Fargo Asset Management. This segment

offers financial planning, private banking, credit, brokerage, investment management, and fiduciary

services to high-net worth clients and their families. For institutional clients, this segment supplies

retirement and trust services, as well.

Market Leader

Wells Fargo focuses on loan

and deposit growth as two of

the company’s main

objectives. In 2015, it was

ranked 3rd in largest banks by

total deposits by Forbes, and

in 2016, the same magazine

ranked Wells Fargo as the 7th

biggest public company in the

world based on sales, profits,

assets, and market value. Wells

Fargo is the #1 retail mortgage

lender and the #1 auto lender

in 2016, and it is the 2nd largest

provider of student loans. The

bank is also ranked highly in

several of its other operations.

Wells Fargo owns 12% of the market share for domestic home loans. The top five mortgage originators in the

United States include Wells Fargo, JPMorgan Chase, Quicken Loans, Bank of America, and PennyMac

Financial. In the first half of 2016, Wells Fargo doubled the volume of the 2nd-place bank, JPMorgan Chase.

Bank of America, also another one of the “big four” U.S. banks, only made a quarter of the mortgages that

Wells Fargo made. Although this is data from before the scandal occurred, Wells Fargo still experienced

growth in new mortgage lending activity during the third quarter of 2016, in the middle of the scandal. This

shows the strength of Wells Fargo’s ability to grow in the face of adversity. The event will become less

sensationalized with time, any negative impacts from the scandal on loan growth will weaken, and it will

continue being the financially-strong bank that it has always been in the past, and continues to be, despite the

scandal.

2016 Investments and Strategies

To maintain its position as the #1 small business lender, Wells Fargo set the goal in the beginning of 2016 to

lend $100 billion in new loans to small businesses by 2018. The bank has reached out to thousands of small

business owners whose loan applications were denied, set them up with a financial coach, and is working to

build their credit so that they can take out commercial loans with Wells Fargo in the future. Wells Fargo has

always focused on lending rather than foreign expansion, and it has paid off in recent years; with the dollar

still holding strong and causing downward pressure on foreign markets’ currencies, international investment

has not been very profitable. Other large banks’ returns have been adversely affected in the last few years,

because they have a greater percentage of their assets held in foreign markets. Meanwhile, Wells Fargo is not

being impacted as greatly by the foreign market slowdown as it continues to grow its lending activities

domestically by opening its operations to include more small business loans. This creative strategy involving

pairing small businesses with a financial coach to eventually create new clients is just one example of how

Wells Fargo is innovating the loan market. Moving forward, small businesses currently account for 99.7% of

American businesses, and decreased regulation and taxes under Donald Trump’s administration may cause

even more small businesses to open their doors.

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

5

Competitive Position

Despite recent criticism regarding the scandal in September, Wells Fargo still retains its competitive

advantage over other banks in many aspects. Cost of equity and cost of capital are two of the most important

numbers to look at when analyzing a bank; meaningful conclusions cannot be made without them. One of

Wells Fargo’s advantages is its lower cost of capital and equity compared to its competitors. Wells Fargo’s

weighted average cost of capital (WACC) is 5.24%, while JPMorgan’s WACC is 5.44%, Bank of America’s

is 6.04%, and Citigroup’s is the highest at 6.64%. Cost of equity is calculated using the CAPM formula.

Using each company’s beta, the risk-free rate, and a market risk premium of 8.5%, I calculated that Wells

Fargo’s cost of equity (COE) is 10.14%, JPMorgan’s COE is 11.67%, Bank of America’s is 11.92%, and

Citigroup’s is 14.73%. These numbers indicate that it costs Wells Fargo comparatively less to raise money

for capital from borrowing, and to raise money from selling equity because WFC’s shareholders require a

lesser return due to the bank’s smaller beta.

Wells Fargo also operates more efficiently than its competitors. An indicator of how investors fared during

the year, return on equity (ROE) measures the amount of net income generated per dollar of equity raised,

and thus is a very important ratio to investors. Wells Fargo’s ROE is the highest of the “big four” U.S. banks;

Wells Fargo’s ROE is 12.78%, while JPMorgan’s is 10.47%, Citigroup’s is 7.02%, and Bank of America’s is

6.37%. In addition, Wells Fargo’s return on assets (ROA) is 1.21%, while JPMorgan’s is 0.96%, Citigroup’s

is 0.82%, and Bank of America’s is 0.70%. Warren Buffet has a reputation for placing great emphasis on

companies’ reputations, often unloading all of Berkshire Hathaway’s shares in companies that encounter

ethical issues. However, he has not sold a

single share of Wells Fargo, noting the

bank’s higher-quality assets and the fact that

it is more profitable and efficient than the

competition. Even after facing negative

publicity and paying the $180 million fine

following the scandal, Wells Fargo’s

financials are strong. Wells Fargo still comes

out on top of the “big four” in many aspects.

Economic and Industry Outlook

Federal Reserve Interest Rate Hikes

There has been a great amount of talk for the past year about when the Fed will begin to raise interest rates.

Janet Yellen, Chairman of the Federal Reserve, indicated in mid-November that the Fed will be rising interest

rates in the very near future. Analysts suspect that the rate hike will begin on December 14, 2016. The prices

of federal funds futures indicate a greater than 95% chance of a quarter-point hike in the federal funds rate,

which currently fluctuates between 0.25% and 0.5%.

Wells Fargo’s profits can be expected to increase following an interest rate hike because its cash reserves will

earn higher yields. In addition, since customer accounts are paid less than the short-term interest rate, there

will be an increased spread between what Wells Fargo will earn on its investments and what it must pay

consumers for their accounts, which also will add to WFC’s bottom line. Yellen recently stated that the

economy has actually been able to withstand a rate hike for a few months, indicating her confidence in the

state of the economy. The housing and automotive markets tends to perform well during times of economic

expansions, meaning that Wells Fargo should continue to experience mortgage and auto loan growth. Rising

interest rates will also cause the bond market to slow, as the fixed interest payments on bonds become less

attractive. This is a good sign for stocks because investors turn away from bonds and look to the stock market

to earn a higher return on their investments. It is likely that the high potential for an increase in WFC’s

income will be attractive to investors, and this will boost its stock price.

Consumer Sentiment

The Index of Consumer Sentiment reached 91.6 in November 2016, an increase from 87.2 the month before.

November’s figure was 2.35% higher than economists had predicted, indicating that consumer outlook is

recovering even faster than expected. The Conference Board expects the U.S. economy to continue

expanding at a moderate pace through early 2017, noting the fact that its Leading Economic Index increased

0.2% in October. The Federal Reserve announced that wages are starting to rise, and although consumers still

Company WACC COE ROE ROA

Wells Fargo 5.24% 10.14% 12.78% 1.21%

JPMorgan Chase 5.44% 11.67% 10.47% 0.96%

Bank of America 6.04% 11.92% 6.37% 0.70%

Citigroup 6.64% 14.73% 7.02% 0.82%

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Stetson University: Investments

Student Research

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6

tend to be cautious, it is believed that they are gaining some confidence due to the fact that credit card

purchases and bank loans have increased over the past month. Consumer discretionary spending has also

increased 3.59% YTD, with many economists citing the improving job market and wage growth as major

contributing factors.

This increase in consumer sentiment and discretionary spending will generate more revenue for Wells Fargo,

as more people begin to take out mortgages to buy houses, make credit card purchases, take out automotive

and personal loans, and open small businesses. If the economy continues to grow (and the Fed’s decision that

the economy can handle a rate hike indicates that it will), consumers will borrow more, which will be a

revenue-driver for Wells Fargo.

Industry Growth

It is common for economists to link the performance of the financial sector to the overall economy because

the companies that comprise the financial sector are so crucial to general economic health. Most financial

companies are very cyclical, meaning that they perform poorly when the economy is struggling, and they

perform well when the economy is prospering. The financial sector is considerably stronger today after

significant restructuring following the financial crisis of 2008. The economy is poised to grow moderately but

consistently over the next year, which is a good sign for the financial industry. The financial industry is up

14.12% YTD, and the sector has received an “outperform” rating.

The financial industry outlook was considerably enhanced after the Fed’s meeting in November where it was

strongly hinted that interest rates would be raised in December 2016; Since the meeting, all of the major

banks in the sector have seen noticeable increases in their stock prices.

President Trump’s Economic Policies

The soon-to-be President has proposed an economic plan that would create a very favorable environment for

banks to operate. An analyst at FBR Capital Markets said in a note to CNBC, “We believe President-elect

Donald Trump’s political agenda—which includes deregulation, lower taxes, increased spending, and a bias

for higher interest rates—paves the road to the most favorable macroeconomic environment for financials

since before the financial crisis.” Since November 8, the KBW Nasdaq Bank Index has risen more than 13%.

Trump has vowed to ease or repeal the Dodd-Frank regulations, which have been blamed, in part, for the very

slow recovery from the 2008 financial crisis. This translates to reduced costs and regulatory burdens for

banks, as they will not have to pay some of the very high costs associated with conforming to these strict

policies.

Currently at 35%, the corporate income tax will be reduced to 15% under Trump’s presidency. If put into

effect, this would significantly reduce banks’ non-operating expenses. Mike Mayo, a research analyst and

managing director at CLSA, discussed the new policies’ impacts on banks, saying, “This decade, banks have

played more defense while they shore up their balance sheets, which are now the strongest in a generation.

But with the new pro-growth administration, banks are likely to transition to offense, where they redeploy

excess capital and liquidity to facilitate growth.” Wells Fargo has consistently had one of the strongest

balance sheets, the most stable growth, and greatest consistency among the major banks. The new economic

policies create an environment for Wells Fargo to thrive; the stock is currently undervalued because WFC

will have the opportunity to grow its revenues and expand its operations like never before, while also

lowering costs.

Financial Analysis Revenue Growth

Wells Fargo has some of the greatest, most consistent revenue growth in the industry. During the first quarter

of 2016, Wells Fargo was able to grow its revenues by $910 million while Bank of America’s revenues fell

by $1.4 billion, JPMorgan’s revenue fell by $820 million, and Citigroup’s revenue fell by $2.18 billion. In the

second quarter of 2016, Wells Fargo was the only big bank that was growing revenue. In fact, Wells Fargo

surpassed Bank of America in revenues this year, and it has a real possibility to exceed JPMorgan in the

future, as well. JPMorgan has taken hits over the past year from its losses in foreign and emerging markets.

Wells Fargo, on the other hand, has seen 1.07% year-over-year quarterly revenue growth, and is focusing on

investing in mortgage and small business lending, demand for both of which are expected to steadily rise

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

7

given the changing macroeconomic environment. Wells Fargo is positioned to continue its revenue growth,

despite setbacks from the scandal. Nasdaq projects Wells Fargo to have positive earnings growth in the next

few years and into the future. Analysts expect WFC’s revenues to grow 0.92% next year over this year’s

forecasted earnings, and they anticipate a 19.49% revenue growth in 2019. The forecasted long-term annual

revenue growth rate for Wells Fargo is very healthy, at 7.92%. In comparison, Bank of America is projected

to grow at a much higher rate over the next year, but its forecasted growth rate in 2019 is 5.05%, and its long-

term growth rate is only 7%. Wells Fargo is currently experiencing some setbacks, but its long-term growth

prospects still look very good.

Strong Margins, Operating Cash Generation and Profit

Expenses have increased during 2016, but Wells Fargo has grown revenues enough to not only cover the

increased expenses, but also grow net income. Wells Fargo is also more profitable than its competitors;

WFC’s profit margin is 26.3%, while JPMorgan’s is 26.13%, Citigroup’s is 22.91%, and Bank of America’s

is 20.7%. In addition, Wells Fargo’s return on assets and return on equity is higher than its other three major

competitors, as stated earlier. Wells Fargo’s operating margin is also expanding, and at 41.38%, it is at a 10-

year high and beating its competitors. In comparison, JPMorgan’s operating margin is 37.26%, Citigroup’s is

33.08%, and Bank of America’s is 32.41%.

Cash Distributions

Wells Fargo has always had very steady dividend growth. This fact combined with its earnings growth is why

WFC stock is one of the more reliable stocks in the financial industry, and several analysts have named WFC

as one of their top “dividend stocks.” During the recession, Wells Fargo only dropped dividends in 2009, and

by 2016, they have quickly recovered to above pre-recession levels. When the scandal in September caused

WFC’s stock price to take a hit, the bank still kept its dividend and earnings growth intact.

Investment Risks

Accounts Scandal

In September 2016, information was leaked that Wells Fargo banking employees had been opening or

applying for more than 2 million credit card accounts under customers’ names without their knowledge in an

attempt to meet sales quotas set by management. I view this as the biggest threat to the company’s revenue

and stock price. The risk is not only that distrustful consumers will leave Wells Fargo for another bank;

Perhaps the greater risk is if investors won’t buy WFC stock out of fear that the scandal was just a symptom a

bigger issue with the company culture and management. The banking industry is plagued with scandal; it

seems as if JPMorgan Chase is always being fined for one scandal or another. In fact, while the attention was

on Wells Fargo’s $185 million fine last quarter, JPMorgan Chase was still paying a billions in accumulated

fines from scandals over the years. Some of the most recent JPMorgan scandals included the bank’s

relationship with Bernie Madoff and the hiring practices scandal in China. JPMorgan Chase has endured

several scandals and the resulting negative publicity and unfavorable public opinion, and its stock always

bounces back eventually. Every scenario is different, but Wells Fargo’s financials are strong and are beating

JPMorgan’s in some aspects. If JPM stock can be revived after the media was calling the bank, “JPMadoff,”

it is highly unlikely that Wells Fargo will never recover its reputation. The negative publicity will simmer

down and public opinion will be reestablished, just as it has several times before with JPMorgan Chase and

other banks. Wells Fargo previously had a stellar record when it came to business ethics; one scandal will not

be the demise of the company.

Not only will this situation not ruin Wells Fargo, I believe that Wells Fargo’s growing financials and the

macroeconomic and regulatory environment put the bank in a position to grow after the storm from the

scandal passes. WFC stock already has (and may continue) to take a hit in the near future, but after

considering history and the bank’s financials, I believe that Wells Fargo will grow and WFC stock is still a

profitable long-term investment.

Uncertainty Surrounding Election and Policies

The stock market had been very volatile for the months leading up to the election, and volatility has

continued even after Donald Trump was elected President. However, one of the only sectors that the news

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

8

actually helped is the financial sector. Overall, Trump’s plan to lower regulations, cut taxes, and provide

incentives for banks to increase commercial lending are pro-growth for banks. However, Trump has surprised

the public with his policy plans since his election, so the risk surrounding the new President-elect is the

possibility of Trump changing his regulatory or tax plans, or the plans not being able to pass through

Congress.

Oil Prices

It is reported that there is only a 40% chance that oil prices will increase. If they did, however, it would lower

consumer discretionary spending on items such as automobiles, for which people often take out loans. In

addition, the housing market slows when oil prices rise, so it would negatively impact auto loan and

mortgage loan volume. Because so much of Wells Fargo’s revenue is generated from mortgage and auto

loans, this risk must still be taken into account.

Interest Rate Hike

Interest rate increases are typically seen as beneficial to bank stocks. However, there is always the risk that if

interest rates rise too quickly or too much, fewer people will buy houses and fewer businesses and consumers

will purchase big-ticket items that require financing. In addition, if Wells Fargo writes many fixed-rate loans,

then it will be losing out on interest income when interest rates rise but those customers are locked into a

fixed, lower interest rate. The risk to Wells Fargo depends on the relative revenue lost from consumers

deciding not to purchase houses and cars and from customers with fixed-rate mortgages versus the revenue

gained from the interest rate spread on deposit accounts, people taking out new loans at the higher rate, and

existing customers with variable-rate loans.

Recommendation

Wells Fargo is strong enough that it has experienced stable earnings growth despite a recession, scandal

setbacks, and increased costs of financing. I believe that Wells Fargo is undervalued because it has strong

dividend growth, earnings, and ratios that often outperform the industry, including the three other large U.S.

banks that stand to be Wells Fargo’s greatest competition. Wells Fargo is currently suffering from negative

public opinion as a result of its accounts scandal that leaked in September. However, consumers will move on

with time and the media will find a new scandal to focus on, just as has happened in the past for other large

banks. Right now, investors are still focusing on the event in September, so the WFC stock price is lower due

to reduced demand. However, investor sentiment about Wells Fargo will recover. In the meantime, Wells

Fargo will continue to grow its bottom line and dividends just as it has historically done. Wells Fargo made a

mistake—a huge one—but the company’s fundamentals and its ability to grow and profit has not changed. In

fact, the result of the election (and the following tax decreases and deregulation), the impending interest rate

hike, increased consumer sentiment and discretionary spending, the company’s positive historical financial

results, and Wells Fargo’s forward-looking focus on small business loan growth all position the bank to grow

well past the price at which it is currently valued. Due to these factors, I believe that WFC is worth $59.89

per share, and I recommend buying shares in Wells Fargo.

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

9

Figure 1: Income Statement

All numbers in thousands

Period Ending Dec 31, 2015 Dec 31, 2014 Dec 31, 2013

Total Revenue 90,033,000 88,372,000 91,247,000

Cost of Revenue 963,000 1,096,000 1,337,0000

Gross Profit 89,070,00 79,502,000 89,910,000

Operating Expenses

Research Development - - -

Selling General and Administrative 48,728,000 47,667,000 47,338,000

Non Recurring - - -

Others 3,688,000 2,765,000 3,813,000

Total Operating Expenses - - -

Operating Income or Loss 6,038,000 5,265,000 3,341,958

Income from Continuing Operations

Total Other Income/Expenses Net 472,800 210,200 15,159

Earnings Before Interest And Taxes 36,654,000 36,844,000 35,851,000

Interest Expense 3,013,000 2,929,000 2,952,000

Income Before Tax 33,641,000 33,915,000 32,629,000

Income Tax Expense 1,255,700 1,266,700 617,954

Minority Interest (382,000) (551,000) (346,000)

Net Income From Continuing Ops 22,894,000 23,057,000 21,878,000

Non-recurring Events

Discontinued Operations - - -

Extraordinary Items - - -

Effect Of Accounting Changes - - -

Other Items - - -

Net Income 22,894,000 23,057,000 21,878,000

Preferred Stock And Other Adjustments - - (30,659)

Net Income Applicable To Common Shares 21,470,000 21,821,000 20,889,000

Currency in USD.

Source: NASDAQ

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

10

Figure 2: Balance Sheet

All numbers in thousands

Period Ending Dec 31, 2015 Dec 31, 2014 Dec 31, 2013

Assets

Current Assets

Cash And Cash Equivalents 713,998,000 669,180,000 560,878,000

Short Term Investments - -

Net Receivables - - -

Inventory - - -

Other Current Assets - - -

Total Current Assets 7,777,700 5,910,500 3,968,282

Long Term Investments 1,362,068,000 1,274,408,000 1,167,426,000

Property Plant and Equipment 8,704,000 8,743,000 9,156,000

Goodwill 25,529,000 25,705,000 25,637,000

Intangible Assets - - -

Accumulated Amortization - - -

Other Assets 102,090,000 100,299,000 87,571,000

Deferred Long Term Asset Charges

Total Assets 1,787,632,000 1,687,155,000 1,523,502,000

Liabilities

Current Liabilities

Accounts Payable 73,365,000 86,122,000 66,436,000

Short/Current Long Term Debt 97,528,000 63,518,000 53,883,000

Other Current Liabilities 1,223,312,000 1,168,310,000 1,079,177,000

Total Current Liabilities

Long Term Debt - - -

Other Liabilities - - -

Deferred Long Term Liability Charges - - -

Minority Interest 893,000 868,000 866,000

Negative Goodwill - - -

Total Liabilities 1,594,634,000 1,502,761,000 1,353,360,000

Stockholders' Equity

Misc Stocks Options Warrants - - -

Redeemable Preferred Stock - - -

Preferred Stock - - -

Common Stock 9,136,000 9,136,000 9,136,000

Retained Earnings 120,866,000 107,040,000 92,361,000

Treasury Stock (18,867,000) (13,690,000) (8,104,000)

Capital Surplus - - -

Other Stockholder Equity 1,065,000 2,158,000 186,000

Total Stockholder Equity 192,998,000 184,394,000 170,142,000

Net Tangible Assets

Currency in USD.

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

11

Source: NASDAQ

Figure 3: Statement of Cash Flows

All numbers in thousands

Period Ending Dec 31, 2015 Dec 31, 2014 Dec 31, 2013

Net Income 22,894,000 23,057,000 21,878,000

Operating Activities, Cash Flows Provided By or Used In

Depreciation 3,288,000 2,515,000 3,293,000

Adjustments To Net Income (47,580,000) (26,748,000) (13,994,000)

Changes In Accounts Receivables (623,000) (372,000) (13,000)

Changes In Liabilities (6,804,000) 15,667,000 (7,177,000)

Changes In Inventories - - -

Changes In Other Operating Activities (4,029,000) (8,327,000) (9.670,000)

Total Cash Flow From Operating Activities 14,772,000 17,529,000 57,641,000

Investing Activities, Cash Flows Provided By or Used In

Capital Expenditures - - -

Investments (112,947,000) (135,162,000) (165,094,000)

Other Cash flows from Investing Activities 5,712,000 6,782,000 11,602,000

Total Cash Flows From Investing Activities (107,235,000) (128,380,000) (153,492,000)

Financing Activities, Cash Flows Provided By or Used In

Dividends Paid (8,826,000) (8.143,000) (6,970,000)

Sale Purchase of Stock (4,231,000) (5,351,000) (283,000)

Net Borrowings 49,707,000 34,360,000 24,414,000

Other Cash Flows from Financing Activities 55,353,000 89,637,000 76,749,000

Total Cash Flows From Financing Activities 92,003,000 110,503,000 93,910,000

Effect Of Exchange Rate Changes - - -

Change In Cash and Cash Equivalents (460,000) (348,000) (1,941,000)

Currency in USD.

Source: Yahoo Finance

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

12

Figure 4: Dividend Discount Model

Dividend (Div) $1.52

Growth1 (g1)13%

Growth2 (g2)10%

Growth3 (g3) 7.2%

Required rate (r) 10.14%

3

3

2

21

3

2

21

2

211

)1(

1

)(

)1()1)(1(

)1(

)1)(1(

)1(

)1)(1(

)1(

)1(

rgr

gggDiv

r

ggDiv

r

ggDiv

r

gDivPWFC

39.61$)1014.01(

1

)072.01014.0(

)072.01()10.01)(13.01(52.1

)1014.01(

)10.01)(13.01(52.1

)1014.01(

)10.01)(13.01(52.1

)1014.01(

)13.01(52.13

2

3

2

2

WFCP

Fair Value: $61.39

Undervalued by: 16.73%

Figure 5: Capital Asset Pricing Model

k = RF + β (RM – RF)

Market Return (RM) 10.73%

Risk Free Rate* (RF) 2.23%

Beta (β) 0.93

*Risk Free Rate calculated as the 10-year Treasury bond yield

Required Rate of Return (k): 10.14%

Figure 6: Holt’s Model

Industry Index: Finance—Global Banks

Average PE 13.46

Growth 7.33%

Stock: Wells Fargo

PE 12.35

Growth 11.22%

0497.10146.00733.01

0297.01122.01

IND

WFC

PE

PE

Fair PE = (1.0497)(12.35) = 12.96

Estimated EPSWFC = $4.05

Fair Value = (12.96)(4.05)(1.1122) = $58.39

Fair Value: $58.39

Undervalued by: 11%

Overall Fair Price: $59.89

Overall Undervalued by: 13.89%

Leah Hauserman

Stetson University: Investments

Student Research

11/18/16

13

Sources

Wells Fargo

Yahoo! Finance

Dividend.com

Bureau of Economic Analysis

Business Insider

Google Finance

American Banker

Investopedia

Guru Focus

TheStreet.com

Forbes

Morningstar

CNN Money

Financial Times

Bloomberg

The Wall Street Journal

CNBC

ABC News

Reuters

University of Michigan Surveys of Consumers

NASDAQ

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