US Bancorp May Have a Serious Valuation Issue

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U.S. Bancorp (NYSE: USB) should be positioned to do well compared with the rest of the major banks in 2018 and beyond. The problem is that you would never know it if you only looked at its stock price. This is the largest regional bank in America, as well as the seventh largest bank in America by assets. Is it possible that all the good things and solid returns are more than fully reflected in the share price?

The bank reported earnings of $0.96 per share on revenues of $5.47 billion, and the consensus estimate was for U.S. Bancorp to post $0.95 in earnings per share. Its net profit was $1.68 billion, and the bank reported a rather high return on tangible common equity of 19.3%. The bank had common equity tier 1 ratio of 9.0%, and it telegraphed that it may seek to raise its dividend to closer to a cap imposed by regulators.

Shares of U.S. Bancorp were lower by about 2% on Wednesday after its earnings, but its stock was actually down about 7% so far in 2018. A small rise on Thursday may be because there are not many analyst downgrades, even if there were multiple price target cuts.

One issue on the results was that there was an added benefit that accounted for the one-cent beat. And revenue was short of the $5.53 billion consensus estimate, despite rising from $5.29 billion a year ago. The bank’s net interest income and expenses grew in the mid-single digits, but the bank’s non-interest income rose by only 0.66%, based on lower fee income in Treasury management, mortgages and commercial products.

One issue that might sooth investors is that U.S. Bancorp’s top shareholder is Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A). With it owning more than 87 million shares, only BlackRock and Vanguard own larger stakes (100 million or more shares each) with their vast array of mutual funds and exchange traded fund products. And over 75% of the float is owned by institutions, which is out of a total market cap of $83 billion.

Despite having a high-quality franchise that is stronger than its peers, it may already be all baked in, based on current valuations. Of the nearly 96 financial stocks in the S&P 500, its 2.3% dividend yield is almost exactly right in the middle of the group.

USBancorp’s book value per common share was $26.54 at the end of the first quarter of 2018, up from $26.34 per share at the end of December and up from $25.05 at the end of the first quarter of 2017. That puts the bank at almost twice book value, a handy premium compared with most of its peer banks.

Multiple analysts have made changes to their price targets after earnings, although not all calls are cautious.

  • Bernstein lowered its target price to $56 from $57.
  • Merrill Lynch reiterated its Underperform rating and its $54 price objective.
  • Keefe Bruyette and Woods lowered its target price to $54 from $56.
  • Morgan Stanley maintained its Underweight rating and lowered its target to $57 from $61.
  • Susquehanna stood out with a target price hike: to $58 from $56.

Back in January, JPMorgan lowered U.S. Bancorp’s rating to Underweight from an already cautious Neutral rating, while Deutsche Bank had raised its rating to Buy from Hold just a few days earlier.

One more issue to consider is that U.S. Bancorp’s stock chart has been looking for support right around the $50 handle. The issue there is that its 52-week trading range is $49.03 to $58.50. The stock was last seen up 1% at $50.51 on Thursday, and the prior consensus analyst target price from Thomson Reuters was above $58.

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