On Monday, Citi analyst Keith Horowitz upgraded U.S. Bancorp (BVMF:USBC34) (NYSE: USB) stock from Neutral to Buy, significantly increasing the price target to $65 from the previous $49. This adjustment reflects a more optimistic outlook on the financial institution's future performance.
U.S. Bancorp's shares have seen a lag compared to its peers, which has been attributed to concerns over a potential decline in return on tangible common equity (ROTCE), due to increased investment spending, underwhelming payment trends, and lower than expected net interest margin (NIM). However, Horowitz notes that U.S. Bancorp is making a turnaround with its investment spending, which is expected to lead to positive operating leverage as expense growth slows down.
The analyst remains conservative regarding the payments sector but suggests that any improvements in this area would be an added bonus. The primary driver for the upgrade is the belief that U.S. Bancorp's NIM issues will resolve over time through the lowering of deposit costs, which is likely due to a higher mix of commercial deposits and opportunities to reprice fixed assets.
With the new price target of $65, Horowitz incorporates early cycle cost of equity assumptions into his valuation. The upgrade to Buy from Neutral is justified by the stock's current trading level, which is seen as undervalued based on Citi's implied cost of equity metric. The analyst concludes that U.S. Bancorp presents a favorable risk/reward scenario at its current market price.
In other recent news, U.S. Bancorp has undergone significant leadership restructuring, with CFO John Stern (AS:PBHP) now reporting directly to the CEO, Andy Cecere. This move is part of a broader strategy to align the company's leadership team with its growth objectives. U.S. Bancorp has also made adjustments to its payments business structure in anticipation of Vice Chair of Payment Services Shailesh Kotwal's retirement.
These developments follow robust earnings reports from U.S. Bancorp, with earnings per share (EPS) of $1.03 in both Q3 and Q4 of 2023, and net revenue of $6.9 billion in Q3 2024. Several financial firms, including Deutsche Bank (ETR:DBKGn), DA Davidson, Oppenheimer, Baird, RBC Capital Markets, and Stephens, have reacted to these results by adjusting their price targets.
Meanwhile, in the investment world, Goldman Sachs noted that hedge funds have shown a marked preference for bank stocks, particularly banks and trading companies, following the U.S. presidential election. This trend is tied to the anticipation of a more relaxed regulatory environment and potential tax reforms under President Donald Trump's new term. Despite this, U.S. Bancorp has expressed a clear stance against mergers and acquisitions, opting instead for organic growth.
These are recent developments for U.S. Bancorp, a company that continues to invest $2.5 billion annually in technology, including AI initiatives, and has successful partnerships with State Farm and Edward Jones.
InvestingPro Insights
U.S. Bancorp's recent upgrade by Citi analyst Keith Horowitz aligns with several positive indicators from InvestingPro data. The bank's stock has shown strong performance, with a 32.59% price total return over the last six months and a 47.75% return over the past year. This upward trend is reflected in an InvestingPro Tip noting that USB is "trading near its 52-week high," currently at 99.62% of that peak.
The company's financial health appears robust, with a market capitalization of $81.89 billion and a P/E ratio of 16.01, suggesting a reasonable valuation relative to earnings. U.S. Bancorp's dividend policy is particularly noteworthy, as highlighted by two InvestingPro Tips: the bank "has raised its dividend for 13 consecutive years" and "has maintained dividend payments for 54 consecutive years." This commitment to shareholder returns is further evidenced by a current dividend yield of 3.81%.
While Horowitz's analysis focuses on potential improvements in net interest margin and operating leverage, it's worth noting that U.S. Bancorp's revenue for the last twelve months stands at $24.9 billion, with an operating income margin of 30.98%. These figures underscore the bank's significant market presence and operational efficiency.
For investors seeking a deeper understanding of U.S. Bancorp's financial position and growth prospects, InvestingPro offers 10 additional tips and a comprehensive set of real-time financial metrics. This wealth of information can provide valuable context for assessing the bank's potential in light of Citi's upgraded outlook.
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