U.S Bancorp: Analyst Upgrade Winner

NEW YORK ( TheStreet) -- U.S. Bancorp ( USB) was the winner among the largest U.S. financial firms Monday, with the stock rising over 1% to close at $34.09.

The broad indices ended with slight declines, as investors seemed to digest the continuing market rally, and looked ahead to political events. The next major deadline for partisan bickering over spending in Washington is March 1, when the federal government will be required by law to make $85 billion in budget cuts, unless there is further action from Congress.

The budget cuts, known as "sequestration," were set up as part of the budget compromise between President Obama and Republican leaders in Congress in 2011, which led to the "fiscal cliff" debate that had investors at the edge of their seats toward the end of last year. This time around, a settlement seems unlikely.

Investors are also looking once again to Europe, with finance ministers in Brussels meeting on Monday and Tuesday to discuss a possible aid package for Cyprus. The officials are also discussing proposals for other bailouts by the European Stability Mechanism.

The KBW Bank Index ( I:BKX) rose slightly to close at 55.13.

Migrating to Quality

U.S. Bancorp's shares have returned 7% this year, following a 21% return during 2011. The shares trade for 2.5 times tangible book value, according to Thomson Reuters Bank Insight. That is the highest price-to-tangible-book ratio among the 24 components of the KBW Bank Index. However, the shares trade for 10.3 times the consensus 2014 earnings estimate of $3.30 a share, which is a relatively low forward P/E ratio for a bank with such strong and consistent earnings.

As discussed in TheStreet's 5 Bank Stocks That Can't Stop Posting Profits, the company was among only 34 actively traded banks to post positive returns on equity every quarter from the beginning of 2006 through the third quarter of last year, according to data supplied by Thomson Reuters Bank Insight.

U.S. Bancorp has stood out among the largest U.S. bank holding companies, with a solid return on average assets (ROA) of 1.62% during 2012, and over the past 10 years, the ROA only slipped below 1% in 2009, when it was 0.82%, and the ROA was above 1.5% each year except for 2009 and for 2010, when it was 1.16%.

Despite such strong performance, USB trades at only a slight P/E premium to many large banks that have much weaker earnings.

Stifel Nicolaus analyst Christopher Mutascio on Monday upgraded U.S. Bancorp and Wells Fargo ( WFC) -- which has had similar recent earnings performance and trades even lower to earnings estimates -- to "buy" from "hold."

The analyst's price target for U.S. Bancorp is $39, implying 14% upside from Monday's close. His price target for Wells Fargo is $42, implying 19% upside from that company's closing price of $35.26 on Monday. Meanwhile, Stifel Nicolaus downgraded Fifth Third Bancorp ( FITB) to "hold" based on the stock's relatively high valuation to his firm's earnings estimates.

Mutascio also downgraded Comerica ( CMA) and KeyCorp ( KEY) to "sell," citing limited earnings catalysts and valuations nearly in line with those of U.S. Bancorp and Wells Fargo.

The analyst said in his report that "the market is allowing investors to purchase low-risk franchises with strong management teams that are generating profitability ratios well in excess of the industry's average at 'no extra charge.' So why not take advantage of what the market is giving us?"

-- Written by Philip van Doorn in Jupiter, Fla.

USB Chart USB data by YCharts

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.


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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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