Wells Fargo (WFC) is one of the most closely watched stocks by Zacks.com visitors lately. Therefore, it might be a good idea to review some of the factors that could impact the stock's short-term performance.

Shares of this largest U.S. mortgage lender have returned +15.6% over the past month, compared to a change of +4.3% in the Zacks S&P 500 Composite. The Zacks Banks – Major Regional industry, which includes Wells Fargo, has gained 9.6% in the period. The crucial question now is: Where could the share develop in the short term?

While media releases or rumors about a material change in a company's business prospects usually cause the stock to “trend” and result in an immediate price change, there are always some fundamental facts that ultimately drive the buy-and-hold decision determine.

Revision of the profit estimate

Here at Zacks, we emphasize evaluating the change in a company's future earnings outlook over anything else. This is because we believe that the present value of future earnings streams determines the fair value of the company's shares.

Essentially, we look at how sell-side analysts covering the stock revise their earnings estimates to reflect the impact of the latest business trends. And when a company's earnings estimates rise, so does the fair value of its stock. A higher fair value than the current market price increases investors' interest in purchasing the stock and results in an increase in the stock price. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

Wells Fargo is expected to report earnings of $1.27 per share for the current quarter, representing a year-over-year change of -1.6%. Over the past 30 days, the Zacks Consensus Estimate has changed -0.4%.

For the current fiscal year, the consensus earnings estimate of $5.10 suggests a year-over-year change of -6.1%. Over the past 30 days, this estimate has changed by -0.3%.

For the next fiscal year, the consensus earnings estimate of $5.39 represents a change of +5.7% from what Wells Fargo was expected to report a year ago. Over the last month, the estimate has changed by -1%.

Our proprietary stock ranking tool, the Zacks Rank, has a strong, outside-audited track record of success and provides a more meaningful picture of a stock's near-term price performance by effectively leveraging the power of earnings estimate revisions. Wells Fargo receives a Zacks Rank of #3 (Hold) based on the magnitude of the recent consensus estimate change as well as three other factors related to earnings estimates.

The story continues

The following chart shows the evolution of the company's forecast 12-month EPS estimate:

12-month EPS

Sales growth forecast

While a company's earnings growth is arguably the best indicator of its financial health, not much happens if it can't grow revenue. It is almost impossible for a company to increase its profits without increasing its sales over long periods of time. Therefore, understanding a company's potential revenue growth is crucial.

For Wells Fargo, the current quarter consensus revenue estimate of $20.42 billion suggests a year-over-year change of -0.3%. For the current and next fiscal years, estimates of $82.57 billion and $83.5 billion suggest a change of 0% and +1.1%, respectively.

Most recently reported results and surprise history

Wells Fargo reported revenue of $20.37 billion in its most recent reported quarter, representing a year-over-year change of -2.4%. Earnings per share for the same period were $1.52, compared to $1.39 a year ago.

Compared to the Zacks Consensus Estimate of $20.38 billion, reported revenues represented a surprise of -0.07%. The EPS surprise was +19.69%.

The company beat consensus EPS estimates in each of the last four quarters. The company topped consensus revenue estimates three times during that period.

Evaluation

No investment decision can be efficient without taking into account the valuation of a stock. When predicting the future price performance of a stock, it is critical to determine whether the current price accurately reflects the intrinsic value of the underlying business and the company's growth prospects.

Comparing the current value of a company's valuation multiples, such as: B. Price to Earnings Ratio (P/E Ratio), Price to Sales Ratio (P/S) and Price to Cash Flow (P/CF), with its own historical values ​​help determine whether the stock is fair, overvalued or undervalued is. However, comparing the company with its competitors based on these parameters gives a good impression of how appropriate the share price is.

The Zacks Value Style Score (part of the Zacks Style Scores system), which considers both traditional and unconventional valuation metrics to rank stocks from A to F (an An is better than a B; a B is better than a C); etc.) is very helpful in determining whether a stock is overvalued, correctly valued or temporarily undervalued.

Wells Fargo gets a grade of B in this regard, suggesting the company is trading at a discount to its peers. Click here to see the values ​​of some of the evaluation metrics that determined this grade.

Diploma

The facts discussed here and much other information on Zacks.com could help determine whether the market excitement surrounding Wells Fargo is worth paying attention to. However, its Zacks Rank #3 suggests that the company could perform in line with the broader market in the near term.

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