Wells Fargo Banks on Strategy; Yen Slows Honda Momentum
Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.
Wells Fargo (WFC)
(Jim: Don’t Buy)
(Mike: Buy)
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Jim: This is the big bank that’s been around California for 150 years. But as you know, Mike, today’s Wells Fargo was created two years ago when a Minneapolis-based bank called Norwest bought the old Wells Fargo but kept the name and Wells Fargo’s San Francisco headquarters.
Mike: Which was a radical departure from the norm, in which out-of-state banks buy California banks and move the home office to East Rabbithash, Mo., or some such place. So Norwest gets credit for at least keeping people employed in San Francisco.
Jim: Yeah, keeping any headquarters in California counts for something these days, because in terms of the Fortune 500 anyway, there aren’t many left.
Mike: Right, because California companies in general keep getting bought and then find their new headquarters are in, oh, I don’t know . . . Chicago?
Jim: But in Wells Fargo’s case this was clearly Norwest’s show, because Norwest’s own guy, Richard Kovacevich, became chief executive of what is today’s Wells Fargo.
Mike: He’s also an alumnus of Citibank.
Jim: Wells Fargo is now the nation’s seventh-largest bank by assets, which total about $218 billion, and it’s got 6,000 branches and other offices in 21 states in the West and Midwest--including about 1,000 in California.
Mike: Now, I want to say right off that the strategy being pursued by Mr. Kovacevich makes my skin crawl.
Jim: You’re referring to his almost religious zeal for “cross-selling,” or trying to get you to buy lots of different financial products from just Wells Fargo.
Mike: You got it. Look, it’s bad enough when I walk into my Bank of America branch to deposit a check and the teller starts asking me whether I’m ready to refinance my house or whether I need an annuity or what I had for breakfast.
Jim: Not to mention that the bank probably charged you $2 just to talk to the teller.
Mike: The whole thing is intrusive, and what’s the value? Wells Fargo claims the average American household uses about 15 financial products--ranging from checking accounts to mortgages to car loans--and this bank wants to sell you all 15 of them.
Jim: And to hear Wall Street tell it, Wells Fargo is as good at the practice as any major bank.
Mike: Big deal. The bottom-line question is whether you get a better deal from one place, like Wells Fargo, rather than shopping for each product or service from competitors. And I simply don’t believe that Wells Fargo can deliver that value over all 15 of those financial instruments it’s peddling.
Jim: It’s hard to tell whether Wall Street agrees with you. Wells Fargo’s stock over the past year has gained about 19%, but almost all of that has come in just the last month.
Mike: And the stock now sells for a relatively cheap 17 times Wells Fargo’s expected 2000 earnings per share.
Jim: Now let’s be fair, though. Kovacevich is running a pretty tight ship. As we’ve said in the past, a bank does well if its return on assets--that is, its profit as a percentage of its assets--is 1% or higher. That’s a sign of how well it’s deploying those assets. And last year, Wells Fargo’s return on assets shot up to nearly 2% from 1% the previous year. Yet having said that, I still wouldn’t buy this stock.
Mike: Really? Frankly, I would.
Jim: What?! After you shoot holes through the bank’s strategy?
Mike: I merely said I wouldn’t want to be a Wells Fargo customer . . .
Jim: But you want to be a stockholder?
Mike: Yes. See, I personally don’t like what Kovacevich is up to, but you just illustrated that the effort is profitable. And as much as Kovacevich whines about Wall Street not appreciating what he’s doing, I think it’s true that investors don’t give Wells Fargo enough credit.
Jim: Not so. Let’s set Kovacevich’s strategy aside for a moment. The banking sector is out of favor right now, and that’s one reason Wells Fargo is languishing. I don’t see that changing soon, because I believe the Federal Reserve will keep pushing interest rates up slightly. When that happens, investors will hate bank stocks even more because higher rates lift the banks’ cost of doing business.
Mike: I’m going to bet that the Fed’s recent trend of raising rates is about to top out. And it won’t be long before investors see that, compared with other banks, Wells has been undervalued.
Jim: I won’t take that bet. And there’s one other reason I’m gun-shy about Wells Fargo. The bank still hasn’t fully integrated the computer systems of the old Wells Fargo and Norwest; most of that will be done this year, and it’s fraught with potential problems. I’ll be glad to revisit Wells Fargo’s prospects a year from now. But until then I’m staying off that wagon--excuse the phrase.
Honda Motor (HMC)
(Jim: Don’t Buy)
(Mike: Don’t Buy)
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Mike: To take this weak metaphor one step further, we move on to a horse of a different color.
Jim: First, we have a disclosure to make, right? We both drive a Honda.
Mike: I drive an Acura.
Jim: Oh, excuse me, Mr. Upscale. Acura is owned by Honda. I assume you’re not driving Acura’s $80,000 NSX sports car?
Mike: No. In fact, I remember the salesman who sold me my car kept telling me it was their “entry- level model,” whatever that means.
Jim: Anyway, Honda simply makes a great car, and it’s a simple fact that its Accord is a top-seller year after year. And Honda’s stock is one that famed money manager Peter Lynch might have liked. Remember how he was famous for just observing people’s buying habits by hanging around malls and the like, and then buying shares of the companies that made the stuff those people bought? Well, one look at Southern California’s freeways and you’d think Honda’s stock is a slam-dunk.
Mike: Yes, and apparently something like 80% of those Hondas on the freeways have been stolen!
Jim: Well, not quite, but the Accord and some other Hondas are annually among the most stolen.
Mike: So the chop-shop boys know value when they see it.
Jim: I’m not sure what investors are seeing, though. Honda’s stock was on a generally upward trend in the late ‘90s, but then went into a steady decline for most of ’99. Yet it’s back up 20% in the past month.
Mike: Let me explain why Honda has problems, Jim. Did you know that in Japan, Honda is not really considered a Japanese car company?
Jim: Why not?
Mike: Because most of its cars, something like two-thirds, are sold outside Japan. So for starters, that means Honda isn’t as well-positioned as some competitors to take advantage of the resurging Japanese economy.
Jim: Right, but its main problem is the Japanese yen, which has been gaining strength.
Mike: In fact, there’s talk that if foreign-exchange rates were excluded for a moment, Honda would have posted record earnings for its fiscal year that ended Friday. And that’s in good part because of very strong U.S. sales these days.
Jim: But we can’t exclude them, and that’s one reason I wouldn’t buy the stock.
Mike: Well, this is where I get back to the horse of a different color. With Wells Fargo, I can’t stand the product but I like the stock. With Honda, it’s the other way around. I just love Honda’s cars but, as much as it pains me to say so, I wouldn’t buy the stock.
Jim: We could buy it and hope the yen falls back, but that’s just guesswork. In the meantime, those robust U.S. auto sales could finally start tapering off, making things even worse for Honda.
Mike: You’re right. Those sales have got to tap out at some point.
Jim: But there is one caveat I’ll throw out. Car companies have been merging like crazy lately, such as Daimler Benz and Chrysler, and speculation is high that Honda might one day get gobbled up. That would boost the stock, but for now it’s mere speculation.
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To suggest a stock you would like to see discussed in this column e-mail Times staff writers James Peltz (james.peltz@latimes.com) or Michael Hiltzik (michael.hiltzik@latimes.com).
