Surging Jobs Number Reinforces the Bull Case for Wells Fargo Stock

Wells Fargo’s (NYSE:WFC) big turnaround continues. WFC stock had collapsed in recent years, hit by the one-two punch of scandal and then Covid-19.

The unwanted accounts scandal has caused Wells Fargo an immense amount of damage including fines, regulation, and a wholesale exodus of former senior management.

Notable investors, including Warren Buffett, bailed out of WFC stock.

Since the peak of the pandemic-induced recession, however, WFC stock has roared back to life. Shares are up from $21 to $50 in less than a year.

The positive trend is continuing. Wells Fargo stock raced higher last week and hit new 52-week highs on Friday. Even after the dramatic recovery, however, Wells Fargo has plenty more upside left.

Here’s why.

Employment Is Strong

On Friday, the government reported jobs data for July. The figure came in at nearly a million added jobs for the month, which was way ahead of expectations. It also was a refreshing change after some weak employment data earlier this summer. Bank stocks soared on the employment numbers.

What’s the direct link between the two? Following the upbeat employment numbers, interest rates leaped higher. This was a much-needed development for the banks. They make more money, after all, when they can charge higher spreads on products such as home mortgages.

Earlier this year, interest rates had popped as traders worried about inflation. However, the Delta variant along with a bit of a slowdown in the economy caused folks to dial back their expectations for inflation and thus, in turn, the speed of Federal Reserve rate hikes.

Now, however, July’s jobs data gave Wall Street a clear reminder that tighter monetary policy is still on the way, regardless of the current uptick in Covid-19 activity. The recovery in interest rates should lead to higher earnings forecasts for Wells Fargo and other big banks.

Valuation Isn’t Demanding

At fresh 52-week highs, you might think the opportunity came and went for WFC stock. However, even after a solid advance, shares are still promising.

For one thing, shares are trading at just 12x this year’s estimated earnings. That’s at worst a median valuation multiple for a large U.S. bank, and it comes in cheaper than several of Wells’ immediate peers.

The more important factor, however, is future earnings. That’s because Wells Fargo is vastly underearning its other big bank rivals due to its accounts scandals. Wells Fargo had to hire a ton of lawyers, back-office staff and other compliance-related employees to deal with its past behavior.

Over time, Wells Fargo will be able to go back to a normal level of staffing. Earlier this year, CEO Charlie Scharf offered a plan to cut $8 billion in annual overhead out of Wells Fargo’s ongoing expenses.

The bank has 4.1 billion shares of stock out. So we’re talking nearly $2 per share in pre-tax annual savings from running a tighter ship.

The bank will lose around 20% of that to corporate income taxes, however, the cost controls should add something like $1.50 per share in earnings from these measures. That would bump Wells’ EPS above $5.50 per share — even assuming no organic growth between now and then — and put the stock well under 10x earnings at the current share price.

WFC Stock Verdict

Wells Fargo is rapidly leaving its scandal-tainted past behind. New management has set the company in a better direction.

Admittedly, the pandemic threw a wrench in the works. Wells Fargo had to slow down its self-improvement program to focus on the immediate pandemic crisis instead. However, the company is back to its long-term vision of cutting costs, cleaning up its remaining scandal liabilities and getting the Federal Reserve to remove Wells’ asset cap going forward.

There is still some heavy lifting to do on these fronts over the next couple of years. That said, by the time Wells Fargo completes this effort, shares are likely to trade at a much higher valuation.

Long-term investors have been rewarded sticking with the bank over the past year, and that’s likely to remain true going forward as well.

On the date of publication, Ian Bezek held a long position in WFC stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.