Is U.S. Bancorp Stock Undervalued?

+34.67%
Upside
46.59
Market
62.74
Trefis
USB: U.S. Bank logo
USB
U.S. Bank

U.S. Bancorp’s stock (NYSE: USB) has gained approximately 1% YTD as compared to the 3% drop in the S&P500 index over the same period. Further, at its current price of $57 per share, it is trading 13% below its fair value of $66 – Trefis’ estimate for U.S. Bancorp’s valuationThe bank posted weak results in the fourth quarter, with total revenues of $5.66 billion – marginally below the year-ago period. The corporate & commercial banking revenues decreased 3% y-o-y, followed by a 9% decline in the consumer banking segment. On the flip side, the negative effect was almost offset by a 5% increase in both the payment services and wealth management divisions. Notably, the core banking revenues mainly suffered due to lower net interest income (NII) due to interest rate headwinds. Overall, the company posted an 11% y-o-y growth in the adjusted net income to $1.6 billion in the quarter. It was driven by a favorable decrease in the provisions for credit losses, partially offset by an increase in the noninterest expenses as a % of revenues.

The bank’s total revenues decreased 2% y-o-y to $22.7 billion in 2021. It was led by a 13% drop in the corporate & commercial banking business, coupled with a 4% decline in consumer banking revenues. Both the above segments suffered due to a decrease in net interest income due to a lower interest rate environment and negative loan growth. That said, the firm posted a 6% y-o-y increase in the payment services unit, thanks to the improvement in the card purchase volumes and merchant transaction volumes. Further, the treasury & corporate support division grew 19% in the year. All in all, despite a drop in revenues, the bank managed to post a 65% y-o-y increase in the adjusted net income to $7.6 billion. It was primarily due to a reduction in provisions for credit losses from $3.8 billion to -$1.2 billion, partially offset by higher noninterest expenses as a % of revenues.

The Federal Reserve has already increased the interest rate by 0.25% and is anticipated to further hike it multiple times in FY2022. This will likely help the net interest income (NII) of U.S. Bancorp. Similarly, improvement in the economic conditions will likely boost the outstanding loan balances and transaction volumes. Altogether, U.S. Bancorp revenues are expected to touch $25.5 billion in FY2022. Additionally, USB’s adjusted net income margin is likely to decrease in the year, from 33.5% to around 25%, leading to an adjusted net income of $6.4 billion. This coupled with an annual EPS of $4.43 and a P/E multiple of just below 15x will lead to the valuation of $66.

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Here you’ll find our previous coverage of U.S. Bancorp stock, where you can track our view over time.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 

 Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 USB Return 1% 1% 11%
 S&P 500 Return 5% -3% 106%
 Trefis MS Portfolio Return 4% -7% 266%

[1] Month-to-date and year-to-date as of 3/29/2022
[2] Cumulative total returns since the end of 2016

 

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