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Wells Fargo Faces Legal Issues, High Costs: Time to Sell?

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We issued an updated research report on Wells Fargo & Company (WFC - Free Report) on Nov 20. The San Francisco-based company has traditionally followed organic and inorganic growth strategies. However, it is struggling with legal issues and escalating costs.

Troubles mounted for Wells Fargo following the revelation of opening of millions of unauthorized accounts in 2016. ‘Cross-selling’, which has been the company’s core strength in recent years, drew regulators’ attention after it was discovered that numerous employees of the bank had unlawfully enrolled consumers in products and services without any consent.

This was followed by the disclosure of issues in the bank’s auto insurance business and online bill pay services. Though Wells Fargo is taking necessary steps to address the issue, it undoubtedly puts the company’s financials under pressure for the near term.

In the past few quarters, the company has been witnessing higher non-interest expenses. Wells Fargo is focused on expense management with the target of reducing $4 billion in costs by 2019. However, the company’s bottom line will continue to be hurt in the near term by legal expenses related to the sales scam and other litigation issues.

Though the company has an impressive capital deployment plan with a decent dividend payout ratio, its debt/equity ratio compares unfavorably with that of the industry. Moreover, the company’s volatile performance in the past few quarters indicates that its capital deployment activities might not be sustainable, which will disappoint shareholders.

However, easing margin pressure and substantial deposits provide some respite to the company. At the same time, Wells Fargo’s financials exhibit improving credit metrics.

Nevertheless, analysts have a negative outlook on the stock. As a result, in the past 30 days, the Zacks Consensus Estimate for 2017 earnings has declined marginally to $3.97 per share from $4.00. The estimate for 2018 earnings has been stable at $4.32.

Wells Fargo currently carries a Zacks Rank #4 (Sell). Notably, the stock has lost 1.9% since the beginning of 2017.

Stocks to Consider

Enterprise Financial Services Corp. (EFSC - Free Report) has been witnessing upward estimate revision in the last 30 days. Additionally, the stock has rallied more than 6.2% in the past six months. It currently carries a Zacks Rank #2 (Buy).

First Financial Bancorp (FFBC - Free Report) has been witnessing upward estimate revision in the past month. Also, the company’s shares have increased nearly 4.9% in the past six months. It holds a Zacks Rank of 2.

JMP Group LLC (JMP - Free Report) has been witnessing upward estimate revision for the last 30 days. The company’s shares have rallied around 3.8% in six months’ time. It also carries a Zacks Rank of 2.

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