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On Wednesday, regional banking stock U.S. Bancorp (USB) will report earnings but its worth noting that the bank has already had a good run-up this year as its heading into earnings up more than 24% since the start of the year. Moreover, Bank of America Merrill Lynch analyst Erika Penala recently suggested that the apparent housing recovery could turn investors away from already high-flying regional bank stocks like U.S. Bancorp to undervalued money center banks. Specifically, Penala noted that portfolio managers jumping into "housing sensitive" stocks has benefited regional banks but it's the money center bank stocks like Citigroup (C) and JPMorgan Chase (JPM) that will be the bigger incremental beneficiaries under a housing theme and another round of quantitative easing. Likewise, regional banks like U.S. Bancorp have put in strong recent earnings reports and are not exactly bargains any more (or rather in Penala's words, they trade "close to fair values"). So where does that leave investors going into the Q3 U.S. Bancorp earnings report and immediately after?

The Numbers Wall Street Expects from U.S. Bancorp

According to the latest summary of analyst estimates from Yahoo! Finance, the Wall Street consensus expects U.S. Bancorp to report an 8.60% revenue rise to $5.14 billion along with an EPS of $0.74 verses $0.64 for the same period last year. The current EPS consensus estimate of $0.74 is up from the $0.70 consensus number three months ago.

For the year, the Wall Street consensus for U.S. Bancorp calls for a 5.90% revenue increase to $20.24 billion while EPS is expected to rise from $2.41 to $2.85; and for next year, the Wall Street consensus expects a 2.70% revenue rise to $20.80 billion along with an EPS rise from $2.85 to $3.05. However, investors should keep in mind that these U.S. Bancorp estimates for both revenue and for earnings could still make moves in either direction depending on a number of factors.

In addition, investors should keep in mind that several large bank or investment banking stocks like JPMorgan Chase, Wells Fargo (WFC), Citigroup, Morgan Stanley (MS) and Goldman Sachs (GS) will have already reported earnings before U.S. Bancorp while Bank of America (BAC) will also be reporting earnings on Wednesday October 17th.

What U.S. Bancorp Reported Last Earnings Season

The last time U.S. Bancorp reported earnings, it beat analyst expectations when it reported a 6.6% rise in revenue to $5.62 billion along with a 17.6% net income rise to $1.42 billion (or $0.71 per share). Specifically, U.S. Bancorp reported that all three categories of payments-related revenue were seasonally strong with growth in virtually every fee category versus the prior quarter while credit quality continued to improve with net charge-offs and nonperforming assets (excluding covered assets) falling by 8.9% and 6.9% respectively.

However, non-interest expense increased 7.3% to $2.6 billion due to higher compensation and benefit costs, higher mortgage servicing review-related professional services costs and other expenses that rose. Other than that, U.S. Bancorp gave investors a solid second quarter performance.

Earnings Aside: What You Need to Consider

With the above in mind, analyst Penala has downgraded U.S. Bancorp from a "Buy" to a "Neutral" rating and she has lowered her price target from $37 to $35 a share - saying the stock's current valuation will come under pressure due to a decline in return on tangible equity that she is forecasting. Penala added that unless there is a significant and upward revision in EPS estimates, there is limited upside in U.S. Bancorp for investors right now. On the other hand, she still views U.S. Bancorp as a high quality franchise for long-term investors thanks to the bank's culture of controlling expenses and having better diversity from spread income.

More specifically, U.S. Bancorp has a strong focus on traditional banking like mortgages (but without the exposure that Wells Fargo has) and small lending while avoiding more exotic and riskier ways to make money like through trading complicated financial instruments (thin JPMorgan Chase and the "London Whale" fiasco). Likewise, U.S. Bancorp is fairly conservatively run in that it's not been out doing large-scale and difficult to digest acquisitions in recent years -instead opting to make small and targeted acquisitions (e.g. Back in January, U.S. Bancorp acquired the assets, deposits and 10 branches of failed Knoxville, Tennessee-based BankEast).

In addition, last August, Standard & Poor's raised U.S. Bancorp's long-term issuer credit rating from an "A" to an "A+" and reaffirmed its "A-1" short-term issuer rating. Standard & Poor's also raised its issuer credit rating from ""A+" to an "AA-" on its operating subsidiaries plus its short-term issuer credit rating went up from "A-1" to "A-1+". The rating agency added that its upgrade was based on its belief that U.S. Bancorp will continue to outperform peers with significant earnings and revenue growth but also maintain a conservative growth strategy along with solid capitalization.

Finally, for what it's worth, investors should be aware that Warren Buffett's Berkshire Hathaway (BRK.B) owns around 66 million shares of U.S. Bancorp worth $2.1 billion at the end of June while 71% of the bank's total shares are owned by institutions or by mutual funds.

A Final Word About the Coming U.S. Bancorp Earnings Report

At the end of the day, the current regulatory environment along with the low interest rate environment will be a headache for all banks, whether they are regional banks or money center bank stocks. Nevertheless, U.S. Bancorp is already in a solid position and should have a good Q3 earnings report - meaning existing investors have no reason to exit (unless its to take some profits off the table). On the other hand, new investors who don't have a long-term time horizon might want to take Penala's suggestion of steering clear of regional banks like U.S. Bancorp and try going for other names that might have more upside potential. Otherwise, conservative long-term investors probably won't go wrong with an investment in a well run regional bank like U.S. Bancorp.

Source: U.S. Bancorp: Conservative Investors Steer Clear