U.S. Bancorp Making Its Way to $40

NEW YORK (TheStreet) -- For more than a year I've sung the praises of U.S. Bancorp's (USB) consistent operational performance, which in my opinion had gone underappreciated by investors who were more enamored with growth.

I won't disagree there's considerably more "flair" associated with the likes of Bank of America ( BAC) and Citigroup ( C). But they also come with an equal amount of risk. I don't believe in substituting "high profile" for fundamental metrics such as operating margin, earnings per share and return on equity -- areas where U.S. Bancorp has consistently outperformed. After another solid earnings report, shares of this bank still look cheap.

After having studied the results of the "big four" banks, which include JPMorgan Chase ( JPM) and Wells Fargo ( WFC), it became clear that revenue growth was a struggle across the entire sector.

So it came as no surprise that U.S. Bancorp posted a 2.4% revenue decline. Relative to expectations, I would say the performance wasn't that bad, especially since the bank improved revenue by 1.5% sequentially, which was on par with both Citigroup and JPMorgan.

As with Bank of America and Wells Fargo, U.S. Bancorp seemed to have had a hard time this quarter with mortgage lending, which led to slight decline in net interest income (NII). But unlike Bank of America, which posted 4% decline in fees, U.S. Bancorp was able to offset its net interest income weakness with a 5% sequential increase in fees.

What's more, amid a highly competitive banking market where everyone is scrounging for loan growth, it should not be taken for granted that U.S. Bancorp was able to post 5.2% year-over-year growth in average total loans, which grew by more than $11 billion. That number is 2% better when excluding covered loans on the bank's run-off portfolio.

What this tells me is that U.S. Bancorp is doing better than just holding its own against Bank of America and JPMorgan in commercial lending, which grew 11% year over year. If there was any cause for concern or a minor red flag, I would point to the 4% sequential increase in operating expenses, which missed Street expectations.

I believe the higher expenses was one of the reasons that caused the 2% decline in net interest income, which was below expectations. In the "too big to fail era," any time bank expenses rise it becomes a big deal, especially with stricter federal regulation ensuring banks are able to meet their capital requirements. In this case, I don't believe this is a situation where U.S. Bancorp management is getting careless.

I'm not going to make excuses for the bank's miss of 3 cents on expenses. But given that U.S. Bancorp still maintained a solid efficiency ratio of 52%, which is better than Wells Fargo's 57% and JPMorgan's 59%, I wouldn't get carried away. The lower the number, the stronger the bank is perceived to be. So, here too, U.S. Bancorp is demonstrating that it just might be safer than two of the better names on the market.

Besides, given how competitive this sector has become, I don't see a scenario where U.S. Bancorp management could have grown average loans by more than 5% without having made some investments. Plus, the fact the bank still managed to meet expectations in net interest margin should negate any near-term worries about its capital-use efficiency.

All told, it was not great a quarter, but it was solid enough to affirm that management has strong focus on the bank's direction. Plus, I don't believe there were any breathtaking performances from within this sector, anyways -- even from the "big four." For U.S. Bancorp, l believe there will be more growth opportunities ahead. The question is to what extent management is willing to go to produce the level of growth that investors crave.

I'm not going to assume that growth will be free, which means expenses are likely to rise. For now I will say that I like the progress that U.S. Bancorp has made. With the bank's strong reputation for return on equity, which currently stands at 14%, these shares still look cheap. Until something changes, I'm going to stick with my price target of $40, which I originally set in April.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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