Analysts have been raising 2004 profit estimates for Wachovia Corp. over the past week, citing stronger market-related businesses and signs that net interest income is improving.
Denis Laplante of Keefe, Bruyette & Woods Inc. added 8 cents to his Wachovia profit outlook Thursday “to reflect higher than previously expected spread income and a pickup in capital markets.” He projects its earnings per share at $3.78.
Michael Mayo of Prudential Financial Inc. gave similar reasons for raising his estimate by 10 cents, to $3.75 a share, on Tuesday. His estimate matches the current average among 17 analysts surveyed by Thomson First Call, which would give Wachovia a healthy 12% growth in earnings per share this year.
In a research note, Mr. Laplante said the Charlotte company’s slightly higher-than-expected asset growth and a new money market deposit sweep account for brokerage customers could boost net interest income or lending profits. “Also, we believe Wachovia should benefit from the pickup in capital markets and we are forecasting a stronger rebound in advisory and other investment banking fees,” he wrote.
Mr. Laplante, who rates the $361 billion-asset Wachovia “market perform,” raised his target price on the shares by $1, to $53.
Wachovia was trading at around $46 Thursday, against $49.10 in early March.
Mr. Mayo, who rates the stock “neutral,” raised his target price this week to $47, from $43. He said strong results last week from Wall Street’s major brokerage and investment banking firms showed that market-related businesses are doing well, and that this should help Wachovia. A risky interest rate bet could also pay off.
Wachovia is one of the few banks still positioned for a lower interest rate environment “even as many economists forecasted higher rates by the second quarter of 2004,” Mr. Mayo wrote.
Wachovia’s stock still carries risks. The company faces a variety of lawsuits and regulatory investigations, and some analysts worry it might do a big acquisition that would eat into profits.
Merger concerns, along with Wachovia’s high valuation relative to some other large banks, led David Hilder at Bear Stearns Cos. to cut his rating on Wachovia to “underperform” from “outperform” last Friday.
“We do not believe,” Mr. Hilder wrote, that Wachovia’s shares “are likely to trade to a premium valuation any time soon because of concerns that Wachovia may make a large and potentially dilutive acquisition to remain closer in size to the four largest banks in the country, which will all soon have equity market capitalizations above $100 billion.”
But Wachovia executives have pledged restraint. Chairman and chief executive G. Kennedy Thompson told shareholders in his company’s annual report, issued earlier this month,, “We believe our industry will continue to undergo consolidation and that we will play a role.” But he added, “We will do so in a disciplined fashion and only when it will enhance our ability to generate consistent and growing earnings per share.” Shares of Wachovia rose 0.6% Thursday.
