Wells Fargo (WFC) posted strong Q2 results on Wednesday, shocking analysts and contributing to a 33% surge in the stock. Consequently, WFC now has a market cap almost as large as Citi’s (WFC surpassed Citi before the latter rallied this morning on its own strong Q2 results).
Peter Eavis, at Heard On The Street, argues that Wells Fargo should use its high valuation to snatch up lenders, especially regional lenders, that are now trading at record lows:
The play-it-safe approach to deals has benefited Wells Fargo over the past decade. But at some point, prices will get tempting. And the bank has a valuation rivals would kill for. Using second-quarter numbers, the stock trades at 1.9 times its second-quarter book value. Bank of America, in contrast, trades at a little more than 70% of its first-quarter book value.
Some regional banks trade even more cheaply than that. Wachovia, for instance, trades at a third of its first-quarter book value. In the coming months, the extent of regional-bank problems could become more visible and, if their valuations remain cheap, acquirers will move in. If Wells Fargo is still flying high, it could clean up.
The problem here is that most regional banks are heavily exposed to prime mortgages, and just as sub-prime-linked assets appear to be bottoming out, prime mortgages are deteriorating rapidly. Jamie Dimon, and Citi CFO Gary Crittenden both expect losses in prime to mount. If WFC really does want to go on a shopping spree, it may be prudent to wait for housing to bottom.
But assuming WFC finally does decide to pull the trigger, Wachovia (WB) might not be a bad target. A Wells-Wachovia merger was the talk of the town before WB’s near-catastrophic takeover of Golden West. Since then, Wachovia share price has tumbled. WB’s current market cap and enterprise value are $27.5 billion and $158 billion respectively, less than a third of WFC’s valuation. Wachovia hasn’t been this cheap since 1991. If Wells is willing to bet that Wachovia’s books are clean enough to justify a takeover, now might be as good a time as any.