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Will Wells Fargo Miss on Earnings?

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Wells Fargo & Company (WFC - Free Report) is set to release its fourth-quarter 2012 results before the opening bell on Friday, Apr 12.

Last quarter it posted a 3.4% positive surprise on the back of a marked improvement in the top line and healthy mortgage business. This represented the 5th straight quarter of positive earnings surprise. Let’s see how things are shaping up for this announcement.

Factors to be Considered this Quarter

Fourth quarter 2012 marked the 12th consecutive quarter of growth in earnings per share for Wells Fargo. The positive developments in the sector and gradually improving macroeconomic elements helped the banking behemoth keep up its illustrious track record.

Though there are concerns related to the impact of legal issues and Wells Fargo’s exposure to the European economy, equity-centric activities in the U.S. are expected to support results in the quarter with continued recovery in the capital markets. Its stress test clearance and subsequent dividend hike reflects a strong capital position. However, higher litigation expenses may keep total expenses high for Wells Fargo.

We believe that the top-line headwinds would persist, given the protracted economic recovery. Plus, a low interest rate environment would keep its margins under pressure. Wells Fargo’s unrelenting legacy mortgage issues also remain a concern. With the thrust of banking regulations, there will be pressure on fees and loan growth could remain feeble.

Activities of this banking giant during the first quarter of the year were inadequate to win analysts’ confidence. The Zacks Consensus Estimate for the first quarter remained stable at 87 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Wells Fargo is likely to beat the Zacks Consensus Estimate in the first quarter. This is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zero Zacks ESP: This is because the Most Accurate Estimate as well as the Zacks Consensus Estimate stands at 87 cents. This leads to a 0.00% ESP for Wells Fargo.

Zacks Rank #3: Wells Fargo’s Zacks Rank #3, however, increases the predictive power of ESP. That said we also need to have a positive ESP to be confident of an earnings surprise call.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Goldman Sachs Group Inc. (GS - Free Report) has an Earnings ESP of +5.69% and carries a Zacks Rank #3. It is scheduled to report its first quarter results on Apr 16.

Citigroup Inc. (C - Free Report) has an Earnings ESP of +1.64% and carries a Zacks Rank #3. It is scheduled to release its first quarter results on Apr 15.

Wells Fargo and JPMorgan Chase & Co. (JPM - Free Report) , with exposure in almost all banking businesses, are the first among the banking big shots to report first-quarter earnings. Therefore, their earnings releases are going to be a significant indicator of the performance of the key banking sector.

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