Bank Of America Downgrades U.S. Bancorp, Says Revenue Expectations Too High

U.S. Bancorp USB shares were trading near-flat Monday in the wake of a Wall Street downgrade. 

The Analyst

Bank of America Merrill Lynch analyst Erika Najarian downgraded U.S. Bancorp from Neutral to Underperform and lowered the price target from $55 to $53.

The Thesis

The company’s new targets of 5-7% revenue growth and 7-10% EPS growth are too optimistic, and the stock’s premium valuation does not reflect the execution risk in its strategy, Najarian said in the Monday downgrade note. (See her track record here.) 

The analyst cut the 2020 EPS estimate from $4.52 to $4.36, about 1% below consensus. BofA also issued a below-consensus 2021 EPS forecast of $4.56.

After factoring in two additional Fed interest rate cuts and 4% annual loan growth in-line with the industry, Najarian said she's modeling just 2% compound annual revenue growth from U.S. Bancorp through 2021.

At the same time, the analyst is calling for 0.22% margin contraction through the end of 2021.

The termination of a consent order related to U.S. Bancorp's BSA/AML compliance program helped the bank post positive operating leverage in five of the last six quarters, but Najarian said that catalyst has now run its course.

“With shares trading at 2.4x TBV, a 50% premium to peers, and 12.6x our updated ‘20E, we believe the ‘headwinds turned tailwinds’ thesis is fully baked into USB’s valuation.” 

Benzinga’s Take

It’s been an unexpectedly difficult environment for bank earnings growth give the somewhat unexpected interest rate cuts from the Fed. Without a clear earnings catalyst, there doesn’t appear to be much room for upside in U.S. Bancorp’s current valuation.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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Photo by Dustin Blitchok.