This Great Stock is a Bargain and Hiding in Plain Sight

When investors think of bank stocks to buy, U.S. Bancorp (USB) typically isn’t a top-of-mind pick. Powerhouses like Bank of America (BAC) and Wells Fargo (WFC) are the usual go-to names. U.S. Bank just doesn’t have as many profit levers to pull as its larger peers do. It’s not a major investment bank, for instance.

Evidence of this investor disinterest can be found in the fact U.S. Bancorp’s shares have underperformed most of its peers’ shares over the past five- and 10-year periods. Investors’ impressions that the stock has become a habitual underperformer may be holding it back now.

Now, though, may be a good time to expect the unexpected. The bank makes a worthy bet for investors today by virtue of its effective asset management, as well as the fact that it was never able to become overly reliant on cyclical businesses like investment banking.

U.S. Bancorp just boasts better banking metrics
U.S. Bancorp is the nation’s fifth-biggest bank as measured by assets, but it’s a distant fifth. The country’s fourth biggest bank, Wells Fargo, boasts nearly $1.7 trillion in assets versus U.S. Bank’s $590 billion. U.S. Bancorp is only slightly bigger than Truist Financial or PNC Financial, two names that aren’t exactly turning a lot of investors’ heads these days.

Don’t be turned off by its lack of reach, however. U.S. Bancorp has a lot to offer investors. Indeed, its lack of business lines above and beyond traditional banking (deposits and lending) may be the reason its business is holding up better than most right now. The numbers say as much.

Take its Q1 tangible common equity ratio as an example. U.S. Bank’s ratio of 6.5% was better than Bank of America’s 5.8%, meaning U.S. Bank has a measurably bigger cushion against insolvency threats stemming from economic turbulence.

It’s not just that it has a bigger buffer against economic weakness, though. U.S. Bancorp is doing relatively more with its smaller toolkit. For instance, its return on its tangible common equity (or ROTCE) for Q1 was 22%, up from its year-ago figure of 16.6%, and up sequentially from Q4’s 11.5%. Contrast that with Wells Fargo’s first-quarter ROTCE of 14%, up from only 10.4% a year earlier. And Bank of America’s Q1 return on tangible common equity was 17.4%, up from 15.5% in the same quarter a year earlier.

U.S. Bank’s loan portfolio is holding up better than average, too. Total charge-offs fell from the fourth quarter’s 0.64% of total loans to only 0.39% in the first quarter. Wells Fargo is faring slightly better on this front, but only slightly. Its Q1 charge-off rate came in at 0.26%. But its charge-off rate has been consistently growing for the past year, while U.S. Bank’s has been falling. Bank of America’s charge-off rate for the first quarter was 0.32%, and it has also been rising over the course of the past four quarters.

The numbers ultimately reflect something else
Don’t be too enamored by the numbers. After all, they’re just data points. A company is so much more than efficiency metrics and valuation figures.

On the other hand, well-run banks often demonstrate management’s savvy control of their operations via data and numbers. In this case, the numbers suggest that U.S. Bancorp’s lending standards are better than average, but that those higher standards aren’t crimping the bank’s capacity to make loans. Its common equity metrics indicate its balance sheet and underlying assets are being wisely managed. (It was on this front that SVB Financial‘s Silicon Valley Bank ultimately went wrong.)

And while you can’t easily quantify it, you can gauge a bank’s attention to detail in what management says when it’s talking to investors about its operations. Case in point: During the company’s first-quarter conference call in April, CEO Andy Cecere made a point of highlighting (when he didn’t have to) the bank’s “disciplined risk management culture.”

“Our reputation as a prudent risk manager has been earned through our performance over many cycles and we have never been more focused on the strength and stability of our balance sheet,” he said.

Every chief executive is a cheerleader for their company, of course, and Cecere’s words were thought out in advance and scripted. Nevertheless, risk mitigation is clearly one of the bank’s top priorities.

Granted, that hasn’t mattered much since early 2020 when the pandemic struck, prompting a series of economic stimulus efforts that are still skewing things. As the ripple effects from those emergency measures finally start to subside, though, U.S. Bancorp’s way of doing business should start mattering more and more to the investment community.

A great stock pick hiding in plain sight
The upside of U.S. Bank’s differentiation speaks for itself, especially in the current complex economic environment. That’s not even the top reason you might want to step into a stake in it right now, however. Far more bullish is the fact that most investors have given up on this stock.

USB shares are now priced 20% below analysts’ consensus target of $41.90 a share. And while the stock is still rated as a lukewarm buy on average (only a little better than a hold), that’s not necessarily a bad thing. It leaves the door open for analyst upgrades, which would inspire the bullishness that’s arguably overdue here.

So don’t make this complicated. U.S. Bancorp is doing things right. Its stock is particularly a compelling bargain right now, with shares trading at less than 8 times next year’s expected earnings, and a reliable dividend that, at the current share price, yields a healthy 5.9% — better than the industry’s current average.

— James Brumley

Source: The Motley Fool