MINNEAPOLIS, MN – U.S. Bancorp (USB), a prominent financial institution in the U.S. banking sector, is signaling a potentially significant investment opportunity for value investors, according to a recent in-depth analysis. With its stock closing at $47.93, a sophisticated valuation model suggests an intrinsic value of $73.99 per share, leading to a “Screaming Buy” classification.
U.S. Bancorp, headquartered in Minneapolis, stands as one of the largest regional banks in the United States. It offers a comprehensive suite of services including retail and commercial banking, wealth management, and payment services. The bank is recognized for its disciplined approach to banking and a robust balance sheet, making it a favored choice among investors seeking both stability and growth.
The valuation model employed in this analysis draws inspiration from methods used by Warren Buffett and adapted by the McGrew method, both specifically designed for financial institutions. Unlike non-financial firms that are typically valued using Free Cash Flow, this approach focuses on “Distributable Earnings,” a metric that adjusts net income for non-cash charges and regulatory capital needs.
Key Findings from the Valuation Analysis:
- Distributable Earnings: For the trailing 12 months (TTM) ending March 31, 2025, U.S. Bancorp’s Distributable Earnings were calculated at $7,607 million.
- Growth Rate Classification: Analyzing the five-year Compound Annual Growth Rate (CAGR) of Distributable Earnings from 2020 to 2024, USB was classified as a “non-growth stock” with a CAGR of 8.53% (below the 10% threshold).
- Intrinsic Value: Both the Buffett-Inspired and McGrew Valuation Methods yielded an identical intrinsic value per share of $73.99 for U.S. Bancorp. This calculation involved projecting Distributable Earnings with a 3% growth rate for the first 10 years, followed by a 2.5% perpetual growth rate, and applying an 8% discount rate.
- Margin of Safety Price: Applying a 25% margin of safety, the price with this buffer is approximately $55.49.
- Valuation Status: Given the current closing price of $47.93, which is 35.24% below the calculated intrinsic value of $73.99, USB has been deemed a “Screaming Buy.”
Financial Performance Metrics:
Beyond the intrinsic value, the analysis also delved into U.S. Bancorp’s efficiency in generating profits:
- Return on Equity (ROE): U.S. Bancorp’s TTM ROE was calculated at 11.44%. This is considered solid for a bank and aligns with the typical range of 10-15% for large regional banks, indicating efficient use of shareholder equity.
- Return on Tangible Assets (ROTA): The TTM ROTA for U.S. Bancorp stood at 1.01%. This figure falls within the normal range of 0.8-1.5% for banks, reflecting the company’s ability to generate returns from its substantial tangible asset base, which is around $676 billion.
Limitations and Considerations for Investors:
While the analysis paints a positive picture, it’s crucial for investors to acknowledge certain limitations:
- Regulatory Capital: The model assumed zero increase in regulatory capital, which may lead to an overstatement of Distributable Earnings. Banks often need to retain capital for growth and to meet regulatory requirements.
- Restricted Cash Data: The absence of explicit data on restricted cash or client funds meant the analysis utilized standard Net Debt, which could potentially influence the valuation.
- Data Constraints: The analysis relied solely on the provided financial data, without incorporating real-time information from sources like SEC filings or Yahoo Finance, which could offer more detailed insights.
- Market Dynamics: The valuation assumes stable economic conditions and growth rates. However, banking stocks are inherently sensitive to fluctuations in interest rates, regulatory changes, and broader economic cycles.
U.S. Bancorp presents a compelling investment case for value-oriented investors. The significant difference between its intrinsic value of $73.99 and its current market price of $47.93 suggests it is substantially undervalued, meriting a “Screaming Buy” rating. The bank’s strong financial efficiency, as evidenced by its 11.44% ROE and 1.01% ROTA, along with its diversified operations and robust capital position, highlight its resilience within the banking sector.
Nevertheless, investors should carefully consider the aforementioned data limitations, particularly regarding regulatory capital and restricted cash. Furthermore, closely monitoring macroeconomic factors such as interest rates and regulatory shifts will be essential. For those prioritizing a margin of safety and seeking long-term value, U.S. Bancorp could indeed represent a standout opportunity in the current market landscape.