Morgan Stanley Sees Opportunity in Wells Fargo (WFC) and Raises Rating to 'Overweight'
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(Updated - September 20, 2016 9:39 AM EDT)
Morgan Stanley upgraded Wells Fargo (NYSE: WFC) from Equalweight to Overweight with a price target of $53.00 (from $56.00), implying upside of 15%. Analyst Betsy L. Graseck warned that headline risk could continue, but she sees value and said shares are "rarely this inexpensive."
"Wells' stock is down 8% in the 8 trading days since it announced a lawsuit settlement on September 8 with the City of Los Angeles and a fine paid to the CFPB and OCC, in total costing 4c, or 1% of 2016e EPS. This 6% underperformance of BKX is in addition to the 7% underperformance in 2016 pre-announcement. Investors are concerned about how much EPS could be hit going forward; we size it at 3% and cut our 2017e EPS by 3%, to $4.10. We expect any additional fines, which we believe is a low probability, would be a one time cost that WFC could handle with its excess capital and would not impair its ability to pay its dividend," said Graseck.
The analyst added, "Recent underperformance, coupled with WFC's dividend payout ratio of ~40%, drives WFC's dividend yield to 3.5%, highest in the group. Current multiple of 11.0x 2017e P/E offers an attractive valuation for this best-in-class dividend yield."
Morgan Stanley's Bull case on the stock is $62 and its bear case is $40.
Shares of Wells Fargo closed at $46.01 yesterday.
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