Over the past six months, U.S. Bancorp has been a great trade, beating the S&P 500 by 8.4%. Its stock price has climbed to $55.23, representing a healthy 16.1% increase. This run-up might have investors contemplating their next move.
Is now the time to buy U.S. Bancorp, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is U.S. Bancorp Not Exciting?
Despite the momentum, we don't have much confidence in U.S. Bancorp. Here are three reasons you should be careful with USB and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Markets consistently prioritize net interest income over non-recurring fees, recognizing its superior quality compared to the more unpredictable revenue streams.
U.S. Bancorp’s net interest income has grown at a 5.9% annualized rate over the last five years, worse than the broader banking industry and in line with its total revenue. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.
2. Low Net Interest Margin Reveals Weak Loan Book Profitability
The net interest margin (NIM) is a key profitability indicator that measures the difference between what a bank earns on its loans and what it pays on its deposits. This metric measures how efficiently one can generate income from its core lending activities.
Over the past two years, we can see that U.S. Bancorp’s net interest margin averaged a weak 2.7%. This metric is well below other banks, signaling its loans aren’t very profitable.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
U.S. Bancorp’s weak 4.7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
Final Judgment
U.S. Bancorp isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 1.4× forward P/B (or $55.23 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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