Shares of Wells Fargo & Co. continued to plunge on Monday, with investors apparently still worried about the effects of last week's prime rate cut by Morgan Guaranty.
In late trading, the stock was off $3.375 to $112.875, down 14.25% from its 52-week closing high of $131.62 on Oct. 13.
"It should be remembered that the stock got over $130 very fast and is only back down to where it was a month or so ago," noted Lawrence W. Cohn of PaineWebber Inc.
Thomas K. Brown of Donaldson, Lufkin & Jenrette Securities Corp. said the bank's third-quarter earnings were solid, but that Wells is viewed as more vulnerable to a lower prime rate than other banks.
Morgan Guaranty Trust Co. last week sliced its prime rate to 5.5%, making it the first major bank to breach the 6% prime level that has been the rule for more than a year.
Interest Income Off
Meanwhile, Wells announced last week that it earned $165 million in the third quarter, or six times its results of a year earlier. But interest income, on which it relies heavily, slipped.
Mr. Cohn said that he was not surprised by the interest revenue figures and that he viewed the weakness in Wells' stock price as a "buying opportunity." He expects the stock to hit $150 to $160 in 12 to 18 months.
J. Richard Fredericks of Montgomery Securities, who recommends the stock, acknowledged that the decline in total loans had been worse for Wells than for other California banks during the state's deep recession, but said this trend is beginning to stop. "The earnings exceeded my expectations, and they also raised the dividend by 50%, which was more than I thought they would. But the stock has gone down almost every day," he said. "I wouldn't have thought it would continue to drop."
Better Plays Elsewhere
A possible explanation offered by Mr. Fredericks is that bank stock buyers currently perceive more upside in the shares of the two other major California banks - BankAmerica Corp. and First Interstate Bancorp.
Wells Fargo itself declined to offer any reasons. "We don't make.any comments about our stock price. That's our policy," said Mary Geraci, a bank spokeswoman.
Downgraded at Peak Price
But Francis X. Suozzo of S.G. Warburg & Co. said Wells stock is under pressure because investors are shifting their focus "from the credit recovery to Wells' trends in earnings power, which have been negative."
Mr. Suozzo downgraded the bank's stock to "sell" from "hold" on Oct. 13, when it reached its peak and had posted a gain of 71% for the year.
"Wells' earnings power has declined from a peak of $15.65 [per share] in 1992 to an estimated $14.15 in 1993, and should fall further to $13.50 in 1994 before beginning to recover modestly," he said.
The analyst said he viewed Wells as "among the best-managed banks in the country" but was concerned that "the company's earnings remain hostage to a weak California economy." He noted that 70% of the bank's revenues are net interest income.
That "high reliance on spread income" means earnings power is sapped by the continuing run-off in loans, a situation compounded by any narrowing in the advantage banks have enjoyed between the prime rate and the federal funds rate.
