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Stop Buying U.S. Bancorp Stock, Says KBW

NEW YORK (TheStreet) -- U.S. Bancorp (USB - Get Report) remains one of the strongest performers among the nation's large-cap banks, but KBW analyst Christopher Mutascio thinks investors considering the stock are better off on the sidelines, for now.

Mutascio on Monday cut his rating on U.S. Bancorp to "market perform" from "outperform," while lowering his price target for the shares to $44 from $45. He also cut his 2014 earnings estimate for the bank to $3.17 a share from $3.25, while cutting his 2015 EPS estimate to $3.37 from $3.45.

"We still maintain that USB shares deserve a premium valuation to the group given its superior profitability measures (ROA and ROTE), low risk profile, and strong management team," Mutascio wrote in a note to clients. The analyst's price target reflects a price-to-earnings multiple of 13 times his 2025 EPS estimate.

The earnings estimate cuts were mainly driven by lower expectations for the release of loan loss reserves, which has been providing an earnings boost for most large-cap banks over the past several years as credit quality has recovered. During the fourth quarter, USB's allowance for credit losses declined by $8 million to $4.250 billion. For all of 2013, the allowance for credit losses declined by $174 million.

Must Read: 'Bull Market Has Legs,' Says Oppenheimer

Another factor in KBW's EPS estimate cuts was a $55 million decline in estimated mortgage revenue for 2014 and 2015, in light of "the weak start to the year" for industry volume, according to Mutascio.

A Long-Term High Flyer

There's no question that U.S. Bancorp has brought home the bacon for investors over the long haul. The company's 2013 return on average tangible common equity (ROTCE) was 24.0%, according to Thomson Reuters Bank Insight. That was, by far, the strongest performance for any large-cap U.S. bank ,with Wells Fargo (WFC - Get Report) in second place, with a 2013 ROTCE of 17.74%.

USB was also the strongest performer among major U.S. banks through the credit crisis, with a minimum annual ROTCE of 15.21% during 2009. For the past 10 years, the bank's ROTCE has averaged a whopping 29.66% -- again the strongest performance for large-cap U.S. banks, although regulatory requirements for higher capital levels mean the bank is unlikely to see ROTCE at the levels it was running before the credit crisis peaked in 2009.

U.S. Bancorp's stock closed at $42.35 Monday, returning 5% this year, following a 30% return during 2013. The shares trade for 3.6 times tangible book value and 12.4 times the consensus 2015 EPS estimate of $3.43. The consensus 2014 EPS estimate is $3.17.

That forward P/E ratio of 12.4 actually compares pretty well to the average forward P/E ratio of 12.7 for the 24 component stocks of the KBW Bank Index (I:BKX). There are many large regional and trust banks trading at higher multiples, despite having less impressive earnings track records.

U.S. Bancorp's stock was down 0.4% in early trading Tuesday, to $42.18.

This chart shows the performance of USB's stock against the KBW Bank Index and the S&P 500 (^GSPC) since the end of 2011:

USB Chart data by YCharts

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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