Should You Buy Wells Fargo (WFC) Stock Ahead of Earnings?

Shares of Wells Fargo (WFC ) gained as much as 2% in morning trading Thursday as investors gear up for the embattled bank giant’s soon-to-be-released earnings report. The firm will join peers like Citigroup (C ) , JPMorgan Chase (JPM ) , and PNC Financial (PNC ) in reporting Friday morning.

Wells Fargo’s report will be another measurement of the company’s ongoing effort to regain public trust in the wake of its fraudulent account scandal, and with other major questions lingering around the entire finance sector, investors will want to pay close attention to this earnings announcement. Here’s what to expect from the bank’s first quarter 2018 report tomorrow.

Industry Trends

Wells Fargo belongs to our “Banks – Major Regional” group, which includes 16 of the largest commercial banks and currently sits in the top 48% of the Zacks Industry Rank. This group has gained nearly 19% within the past 52 weeks, but many of the industry’s top stocks have slumped over the past month as new headwinds threaten its strong momentum.

The main concern for investors in this space is interest rate uncertainty. Yields on the benchmark 10-year Treasury note have moved sideways recently—a change to the uptrend in treasury yields that had been witnessed since September. The Fed is expected to continue tightening its monetary policy, but now it is unclear whether the central bank will target four rate hikes, or more, this year.

Investors with exposure to the banking industry will continue to monitor this story as they clamor for higher interest rates, which typically serve as an earnings growth catalyst.

Latest Outlook and Valuation

The Zacks Consensus Estimate for Wells Fargo’s quarterly earnings is pegged at $1.07. This would mark a decline of about 1.5% from the year-ago period. Nevertheless, the bank is projected to post revenue of $21.70 billion, an improvement of 7.0% on a year-over-year basis.

Ahead of its report, Wells Fargo is trading with a Forward P/E of 10.7. This is a slight discount to the industry average of 11.8. Over the past year, the stock has traded as high as 15.6x forward 12-month earnings and as low as 10.6x. Its median Forward P/E over this time is 12.5.

Earnings ESP Whispers

Investors will also want to anticipate the likelihood that Wells Fargo surprises investors with better-than-anticipated earnings results. For this, we turn to our Earnings ESP figure.

Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

Wells Fargo is currently sporting a Zacks Rank #3 (Hold) and an Earnings ESP of 0.7%. This means that the most recent analyst estimates have been higher than the consensus. In other words, our model is suggesting that a beat is likely.

Surprise History

Investors also want to consider Wells Fargo’s history of earnings surprises and the effect that these beats have had on share prices. The company missed earnings estimates in the most-recent quarter, but before that, it had surpassed our consensus in five-consecutive quarters. However, the stock has not always performed well during earnings season.

We judge the price effect of these earnings beats by comparing the closing price of the stock two days before the report and two days after the report. Over the last six quarters, Wells Fargo has only moved higher once during this window.

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