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We have recently reaffirmed our long-term Neutral recommendation on Wells Fargo & Co. (WFC - Analyst Report) based on its solid fundamentals and strategic acquisitions amidst the current stressed operating environment.

We believe that investors should not be disappointed with their investments in Wells Fargo over the long term given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. The company has overcome the financial crisis well and as of the second quarter of 2012, it has achieved growth in earnings per share for ten consecutive quarters.

Wells Fargo reported earnings of 82 cents per share in second quarter 2012, which surpassed the Zacks Consensus Estimate of 81 cents. Its earnings per share also augmented 9.3% sequentially and 17.1% year over year, reflecting improvements in mortgage banking business and credit quality. It experienced record quarterly mortgage applications and increases in lending to consumers and businesses.

Moreover, strategic acquisitions will also help expand Wells Fargo’s business and improve profitability. Notably, in the first half of 2012, the company completed three acquisitions with combined total assets of $4.5 billion. Further, on August 1, the company completed the acquisition of a prime brokerage and technology provider with assets of approximately $280 million. In addition, it is capitalizing on the deleveraging activities of European banks.

Also, it has announced consecutive dividend increases over the past three years with the latest hike of 83.3% being announced in March 2012.

Yet, increasing demands for mortgage buybacks, tepid economic recovery, low interest rate environment and regulatory issues remain our concern. But we believe that given its solid profitability potential, it can efficiently manage the mortgage repurchase issue and navigate through the current stressed operating environment.

Moreover, the shares of Wells Fargo, which competes with Fifth Third Bancorp (FITB - Analyst Report) and M&T Bank Corp. (MTB - Analyst Report) among others, retain a Zacks #3 Rank, which translates into a short-term Hold rating over the short term.
 

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