U.S. Bancorp (USB) is set to unveil its fiscal 2023 fourth quarter financial results on January 17. Analysts estimate that the quarter’s revenue will climb by 8.4% year-over-year to $6.87 billion. Additionally, the company's EPS is projected to increase 58.5% from the corresponding period last year, reaching $0.90.  

However, the consensus revenue estimate of $6.82 billion for the fiscal 2024 first quarter ending March 2024 indicates a 4.6% year-over-year decrease. Likewise, the consensus EPS estimate of $0.93 for the current quarter exhibits a 10.2% decline from the prior year’s quarter.

And even though USB exceeded third-quarter earnings projections, the company’s outlook remains blurry given the challenging economic environment. Due to consumers' greater borrowing costs and smaller budgets, the Federal Reserve's "higher-for-longer" interest rates present concerns and might affect USB's prospects.

The fact that USB has increased its reserves for potential loan defaults from $362 million to $515 million year-over-year indicates its ability to sustain its current level of profitability.

Moreover, the bank might be signaling a conservative stance, which could raise doubts about the bank's capacity for development given its proactive measures to reduce risk, which include conducting sales for around $7 billion and reducing its investment portfolio by $30 billion.

Furthermore, the looming possibility of USB being categorized as a Category II bank with stricter regulations could further fuel investor skepticism, prompting them to closely monitor the bank's ability to navigate these challenges and sustain profitability. Shares of USB have plunged 11.4% over the past year to close the last trading session at $42.15.

Here are the financial aspects of USB that could influence its performance in the near term:

Weak Financials

For the fiscal 2023 third quarter that ended September 30, 2023, USB’s adjusted income before taxes decreased 4.1% year-over-year to $2.27 billion. Its adjusted net income and adjusted earnings per common share declined 6.1% and 11% from the prior year’s period to $1.74 billion and $1.05, respectively.

In addition, as of September 30, 2023, USB’s total assets amounted to $668.04 billion, down from $674.81 billion as of December 31, 2022.

Mixed Historical Growth

Over the past five years, USB’s revenue and net interest income increased at a CAGR of 3.7% and 6.6%, respectively. However, its net income and EPS decreased at respective CAGRs of 4.5% and 3.4% during the same period. Also, the company’s tangible book value declined at a CAGR of 2% over the same time frame.

Mixed Valuation

In terms of forward Price/Sales, USB is trading at 2.33x, 11.5% lower than the industry average of 2.63x. However, its forward non-GAAP PEG of 1.75x is 16.7% higher than the 1.50x industry average. Also, the stock’s forward Price/Book of 1.38x is 19.7% higher than the 1.15x industry average.

Mixed Profitability

The stock’s trailing-12-month ROCE of 11.81% is marginally higher than the 11.72% industry average. However, its trailing-12-month net income margin of 22.39% is 10.9% lower than the industry average of 25.13%. Additionally, its ROTA of 0.82% is 28.9% lower than the 1.16% industry average.

POWR Ratings Exhibit Bleak Prospects

USB’s poor outlook is apparent in its POWR Ratings. The stock has an overall rating of D, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. USB has a D grade for Sentiment, reflected in its poor current quarter analyst estimates. In addition, the stock has a C grade for Stability, evidenced by its 24-month beta of 1.17.

The stock is ranked #9 out of 10 stocks in the F-rated Money Center Banks industry. Click here to access USB’s Growth, Value, Momentum, and Quality ratings.

Bottom Line

The combination of economic headwinds, a conservative risk management approach, and regulatory uncertainties create a complex environment that may impact USB’s growth potential. The bank’s recent poor financial performance in the latest quarter raises further concerns.

Moreover, the company's moderate valuation, coupled with suboptimal profitability and stability, paints a cautionary picture. Considering this less-than-rosy scenario, it could be wise to steer clear of USB for now.

How Does U.S. Bancorp (USB) Stack Up Against Its Peers?

While USB has an overall grade of D, equating to a Sell rating, you may check out these other B (Buy) stocks within the Foreign Banks industry: Banco Santander, S.A. (SAN), Erste Group Bank AG (EBKDY) and KB Financial Group Inc. (KB). To explore more Foreign Banks stocks, click here. 

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

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USB shares were trading at $41.46 per share on Tuesday afternoon, down $0.69 (-1.64%). Year-to-date, USB has declined -4.21%, versus a -0.17% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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