U.S. Bancorp’s Stock Is Down 40% In 3 Months, But It Could Shrink Another 40% In The Next 3

Having shed 43% of its value in 2020, U.S. Bancorp’s stock may yet slide some more. Why is that? Well, U.S. Bancorp’s (NYSE: USB) revenues would face a significant challenge due to lower commercial and consumer spending, not to mention the higher risk of loan defaults, resulting in lower earnings for the year. Our dashboard How Low Can U.S Bancorp Stock Go provides the key numbers behind our thinking for the drop, and we explain more below.

The point is, a significant contributor to this stock growth from the last two years was U.S Bancorp’s strong earnings per share. In contrast, U.S. Bancorp’s P/E ratio, on a trailing basis, was around 14.2x at the end of 2017 and was roughly at the same level at the end of 2019. The P/E multiple is down to about 8x now, which is roughly 43% lower than the P/E figure at the end of 2019. And a sharper-than-expected reduction in earnings could take the multiple lower – making $20 a real possibility for U.S. Bancorp’s stock under our downside scenario.

So what’s the likely trigger and timing to this downside?

People are focused almost entirely on essentials rather than discretionary and leisure expenses due to economic uncertainty. It means they are not meeting friends and colleagues for drinks, lunch, or dinner, not going to movies, amusement parks, vacation trips, etc. As the bank is heavily dependent on its consumer banking and card & payment services (which together contributed around 65% of its revenues in 2019), in the wake of a global economic meltdown and widespread panic, the revenues could be negatively impacted due to a drop in consumer demand and global economic slowdown. Moreover, this could impact the loan repayment capacity of customers – exposing the bank to the possibility of sizable loan losses. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations.

While recently released Q1 results saw a slight growth in revenues, we believe that Q2 results in July will take a much bigger hit. It is also likely to accompany a lower Q3 as-well-as full-year 2020 guidance. Specifically, we believe the full-year revenue expectations formed by the market at the time of July’s Q2 results may be closer to $18.3 billion – 16% lower than its 2017 revenue of $21.7 billion and 20% lower than the 2019 revenue of $22.9 billion. A separate dashboard shows key components of U.S. Bancorp’s revenues under our base case scenario forecast.

This could potentially trigger a sell-off, and U.S Bancorp’s P/E will very likely remain around the current 8.0x, which is about 43% lower than the 2019 P/E of 14.1x and at the lowest level in the last four years. Further, margins are expected to drop by 25%, which would mean a 40% drop in earnings, translating into U.S Bancorp’s price drop of 40%, to about $20 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of U.S Bancorp’s multinational peers, including JPMorgan and Citigroup. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe U.S Bancorp’s stock price at levels of $41 (Trefis price estimate) and below provide a buying opportunity for investors willing to be patient.

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