Banks Stocks

US Bancorp Analysis – August 2015 Update $USB

500px-U.S._Bancorp_logo.svgIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how US Bancorp (USB) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): U.S. Bancorp is a multi-state financial services holding company. The Company operates through its banking subsidiary, U.S. Bank National Association, is engaged in the general banking business in domestic markets. The Company provides a range of financial services, including lending and depository services, cash management, capital markets, and trust and investment management services. It also engages in credit card services, merchant and automated teller machines (ATM) processing, mortgage banking, insurance, brokerage and leasing. U.S. Bank National Association provides a range of products and services to individuals, businesses, institutional organizations, governmental entities and other financial institutions. Its commercial and consumer lending services are offered to customers within the Company’s domestic markets, to domestic customers with foreign operations and to large national customers operating in specific industries targeted by the Company.

Defensive Investor – must pass all 6 of the following tests: Score = 6/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $45.24
MG Value $82.10
MG Opinion Undervalued
Value Based on 3% Growth $43.65
Value Based on 0% Growth $25.59
Market Implied Growth Rate 3.26%
PEmg 15.03
PB Ratio 1.81

Balance Sheet – June 2015

Total Debt $34,141,000,000
Total Assets $419,075,000,000
Intangible Assets $12,599,000,000
Total Liabilities $374,538,000,000
Outstanding Shares 1,779,000,000

Earnings Per Share

2015 (estimate) $3.14
2014 $3.08
2013 $3.00
2012 $2.84
2011 $2.46
2010 $1.73
2009 $0.97
2008 $1.61
2007 $2.43
2006 $2.61
2005 $2.42

Earnings Per Share – ModernGraham 

2015 (estimate) $3.01
2014 $2.84
2013 $2.54
2012 $2.19
2011 $1.85
2010 $1.66

Dividend History

Conclusion

US Bancorp qualifies for both the Defensive Investor and the Enterprising Investor.  Neither investor type has any initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.85 in 2011 to an estimated $3.01 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 3.26% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on US Bancorp (USB)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

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