USB Is a Bank Stock Bargain

NEW YORK ( TheStreet) -- With its stock clearly lagging the market, U.S. Bancorp ( USB) looks like more of a bargain for long-term investors every day.

USB's shares closed at $33.49 Friday, returning just 5% this year, compared to a return of 14% for the KBW Bank Index ( I:BKX). That's the second-worst year-to-date total return (including reinvested dividends) among the 24 index components. Only Capital One Financial ( COF) has seen a smaller return of 3%.

U.S. Bancorp's shares trade for 10.3 times the consensus 2014 earnings estimate of $3.24 a share, among analysts polled by Thomson Reuters. That valuation is lower than the forward price-to-earnings ratios of 14 other components of the KBW Bank Index.

Strong Earnings Through Thick and Thin

Over the past three full calendar years, in the aftermath of the credit crisis, U.S. Bancorp of Minneapolis has had the strongest earnings performance among large banks in the United States, with returns on average assets (ROA) improving from 1.15% in 2010 to 1.62% in 2012, according to Thomson Reuters Bank Insight. Over the same period, U.S. Bancorp's return on average common equity (ROCE) improved from 12.67% in 2010 to 17.12% in 2012.

Among the nation's largest banks, only Wells Fargo has seen anything close to comparable performance over the same period, with ROA improving from 1.00% in 2010 to 1.40% in 2012, and ROCE improving from 11.17% in 2010 to 13.78% in 2012.

When looking over a much longer period of 10 years through 2012, the numbers are even more striking. USB's mean ROA for the past 10 full calendar years was 1.68%, with a mean ROCE of 18.13%. Among the largest U.S. bank holding companies, Capital One had similar mean ROA of 1.64% during that 10-year period, although the company's mean ROCE was lower, at 12.45%, reflecting higher capital levels during several of those years. Wells Fargo's mean ROA was 1.34% over the 10-year period, while its mean ROCE was 15.45%.

Among the components of the KBW Bank Index, the only other names with similar strong long-term earnings performance have been smaller regional players. Cullen/Frost Banks ( CFR) of San Antonio had a mean ROA of 1.37% and a mean ROCE of 14.08% over the 10-year period, while Commerce Bancshares ( CBSH) of Kansas City, Mo., had a mean ROA of 1.33% and a mean ROCE of 13.31%.

During the first quarter of 2013, U.S. Bancorp again led the biggest banks with an ROA of 1.63% and an ROCE of 1.61%.

All these numbers emphasize just how remarkable it is that U.S. Bancorp's stock has underperformed. A few more offer further evidence.

Bank of America ( BAC) has been a favorite post-crisis punching bag, although in the eyes of regulators and politicians, the prime bank target has now become JPMorgan Chase ( JPM), in light of the "London Whale" hedge trading losses of at least $6.2 billion during 2012, which JPMorgan easily brushed off on its way to record annual earnings.

With Bank of America scoring several recent successes in its attempts to work past the legacy mortgage mess left over after its acquisition of Countrywide Financial at the height of the financial crisis in 2008, the company's shares have returned over 12% this year through Friday's close at $13.02. That performance follows a return of 110% during 2012. Bank of America's shares trade for 10.1 times the consensus 2013 EPS estimate of $1.29.

Despite the wonderful recovery this year and last, the 10-year return for Bank of America's shares through Friday's close was a dismal negative 53%, reflecting the mortgage losses and dilution from common share offerings in the wake of the crisis. During the same period, U.S. Bancorp's shares returned 111%.

The long-term stock performance follows the earnings trend, which is hardly surprising. After all, Bank of America has only been marginally profitable over the past two years, and its mean ROA for the past 10 calendar years has been 0.75%, with a mean ROCE of 9.22%.

But why does Bank of America trade for 10.1 times the consensus 2014 EPS estimate of $1.29, which is nearly has high as U.S. Bancorp's forward P/E? For one thing, the market likes movement, and the consensus 2014 EPS estimate for Bank of America is 33% higher than the consensus 2013 EPS estimate of 97 cents. Analysts expect Bank of America's recovery to continue in 2014, with EPS of $1.52.

For U.S. Bancorp, the 2014 EPS estimate of $3.24 is only 7% higher than the 2013 estimate of $3.04. The consensus 2015 EPS estimate is $3.54.

It would appear that Bank of America's stock may be a bit overheated at the moment. Then again, investors also place a high value on the nation's largest retail branch network.

Valuation and Stock Performance Comparisons -- Regional Banks

Bank of America is also not a very fair comparison for U.S. Bancorp because of BAC's much greater regulatory burden and its legacy mortgage headaches.

Here are some large regional banks trading for higher forward P/E ratios than U.S. Bancorp:
  • Zions Bancorporation (symbol) of Salt Lake City. The shares trade for 13.6 times the consensus 2014 EPS estimate of $1.92. The bank's ROA has improved from a negative 0.57% to a positive 0.65% over the past three full years, while its ROCE has improved from a negative 6.53% to a positive 7.39%. Through Friday's close at $26.15, the shares had a 10-year total return of negative 38%.
  • Comerica (CMA) of Dallas. The shares trade for 13.3 times the consensus 2014 EPS estimate of $2.85. The bank's ROA has improved from 0.49% to 0.83% over the past three full years, while its ROCE has improved from 4.89% to 7.45%. Through Friday's close at $37.95, the shares had a 10-year total return of 19%.


  • M&T Bank (symbol) of Buffalo, N.Y. The shares trade for 11.7 times the consensus 2014 EPS estimate of $8.82. The bank's ROA has improved from 1.08% to 1.28% over the past three full years, while its ROCE has improved from 10.03% to 11.68%. Through Friday's close at $103.52, the shares had a 10-year total return of 62%.
  • KeyCorp (KEY) of Cleveland. The shares trade for 10.7 times the consensus 2014 EPS estimate of 96 cents. The bank's ROA has ranged from 0.59% to 0.98% over the past three full years, while its ROCE has ranged between 6.80% and 9.90%. Through Friday's close at $10.30, the shares had a 10-year total return of negative 44%.
  • Huntington Bancshares (symbol) of Columbus, Ohio. The shares trade for 10.7 times the consensus 2014 EPS estimate of 70 cents. The bank's ROA has improved from 0.60% to 1.14% over the past three full years, while its ROCE has improved from 8.10% to 12.17%. Through Friday's close at $7.49, the shares had a 10-year total return of negative 47%.
  • SunTrust (STI) of Atlanta. The shares trade for 10.5 times the consensus 2014 EPS estimate of $2.90. The bank's ROA has improved from 0.11% to 1.11% over the past three full years, while its ROCE has improved from 1.05% to 9.79%. Through Friday's close at $30.46, the shares had a 10-year total return of negative 33%.

U.S. Bancorp's leading long-term stock performance underlines its excellent and consistent earnings performance and its lower risk. But over the short term, investors are not thrilled about the company's revenue prospects, with industry expectations for lower mortgage lending volume this year, and continued pressure on interest margins in the prolonged low-rate environment.

Revenue Concerns

U.S. Bancorp reported first-quarter net income of $1.43 billion, or 73 cents a share, increasing from $1.42 billion, or 72 cents a share, in the fourth quarter, and $1.34 billion, or 67 cents a share, in the first quarter of 2012. The company reported first-quarter mortgage banking revenue of $401 million, declining from $476 million the previous quarter, and $452 million a year earlier.

Please see TheStreet's earnings coverage for full details on USB's results, including its lower expenses that offset the mortgage revenue decline.

After visiting with U.S. Bancorp's management, Deutsche Bank analyst Matt O'Connor in a note to clients on Saturday wrote that the underperformance of the shares "reflects concern that revenue and EPS growth are stalling."

But O'Connor expects the company's second-quarter mortgage revenue to rebound 15% from the first quarter, which "will be better than expected given industry wide apps are up 10%-plus and gain on sale seems higher."

"Loan growth seems to be on track (i.e. 4-6% annualized, q/q), with some positive momentum in corporate banking," O'Connor wrote.

The analyst rates U.S. Bancorp a "buy," with a price target of $38.00, estimating the company will earn $3.07 a share this year, with EPS increasing to $3.30 in 2014 and $3.71 in 2015.

USB Chart USB data by YCharts

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

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

>Contact by Email.

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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