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MARKET BEAT / TOM PETRUNO

Analyst's Forecast Says Wells Is a Stock to Bank On

February 07, 1996|TOM PETRUNO

Some extremely bullish new earnings estimates for the soon-to-be-combined Wells Fargo & Co. and First Interstate Bancorp have helped drive both stocks to record levels this week.

That's making the rich a little richer: Wells Fargo's major shareholders include billionaires Warren Buffett and Walter Annenberg.

Wells shares zoomed $8.25 on Monday and added $4.375 on Tuesday to close at a record $251.625. First Interstate stock is rising in tandem, of course, because the merger terms to which the two banks agreed Jan. 24 call for 0.667 Wells share to be swapped for each First Interstate share.

That makes the deal currently worth $167.83 a share to First Interstate shareholders.

Since the merger was announced, Wells stock has jumped 9.6% and First Interstate 11%, with most of the gain in Wells coming this week--after Bear, Stearns & Co. bank analyst Lawrence Vitale on Monday wrote a gushing report on the combined bank's earnings potential.

Vitale believes that the "new" Wells' cash earnings will soar from $22.50 a share this year to $28 in 1997 and $33 in 1998, thanks to "increased loan volume, higher margins, improved efficiency and continued aggressive share repurchases."

How optimistic are those numbers? Vitale insists he is actually being conservative and that he could make a case for earnings as high as $34.40 a share in 1998. Even at $33, if he is correct, Wells in 1998 will generate about $3 billion in cash profit.

In contrast, BankAmerica Corp. currently earns less than that annually with an asset base twice the size of the combined Wells-First Interstate.

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Of course, Wells has consistently been vastly more profitable than BankAmerica and most other major banks. But some other Wall Street analysts, many of whom are still fine-tuning their 1997 and 1998 estimates for the new Wells, are wide-eyed at Vitale's numbers. "I couldn't even make it close to those" figures, said Campbell Chaney, analyst at brokerage Rodman & Renshaw.

Vitale concedes that Wells management "has a lot of work to do" in absorbing First Interstate. Nonetheless he argues that among banks, Wells is almost in a class by itself in the quality of its management and in its commitment to boosting shareholders' returns, especially through constant stock buybacks--a favorite Buffett strategy.

If Vitale's earnings numbers are on target, he figures Wells stock should sell for between $330 and $360 within two years, a hefty gain of between 31% and 43% from the current price.

Embattled Credit Union: San Dimas-based WesCorp, also known as Western Corporate Federal Credit Union, seems to be caught up in a battle royal with its regulator, the National Credit Union Administration in Alexandria, Va.

WesCorp, with nearly $12 billion in assets, is a credit union to credit unions: It doesn't do business with individuals, but rather invests monies on behalf of other credit unions, including many serving major Hollywood studios' employees.

Last summer WesCorp was the subject of much industry and regulatory scrutiny because of its aggressive investment portfolio, which included a substantial amount of "derivative" securities such as collateralized mortgage obligations. Some people worried that WesCorp CEO Richard M. Johnson was headed down the same path as former Orange County Treasurer Robert Citron.

Not so, Johnson continually insisted, and he got independent accounting firm Coopers & Lybrand to agree with him. But the NCUA apparently still has problems with Johnson and WesCorp. The newsletter Credit Union Accountant reported Monday that WesCorp has been given a "4" rating by the NCUA, which rates all credit unions on a 1 to 5 scale, with 5 being the lowest rating.

Government rules forbid either NCUA or WesCorp from publicly confirming or discussing the official rating. But NCUA insiders say the 4 rating, while troubling, doesn't reflect concerns about WesCorp's safety or soundness. Rather, "this is a management issue," one NCUA official said.

What's the NCUA's beef with Johnson? Some of WesCorp's member credit unions are asking the same thing. "I have complete and total faith in [Johnson's] ability to manage WesCorp," said Bobby Woodrell, chief financial officer of Hollywood's AFTRA-SAG credit union.

Some industry insiders say the NCUA may simply be extra jumpy because of last winter's failure of Capital Corporate Federal Credit Union. WesCorp had wanted to buy Capital, arguing that it could fix the organization's troubled portfolio. But the NCUA nixed the deal--a slap at Johnson--and Capital instead went belly-up.

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Banking Rocket

Wells Fargo shares have soared in recent days on rising optimism about its earnings potential after it swallows First Interstate Bancorp. Monthly stock closes on the NYSE and latest:

Tuesday: $251.63

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