Friday, January 06, 2006

U.S. Bancorp Research Report

  
Friedman, Billings, Ramsey & Co., Gary B. Townsend, CPA, Bob Ramsey, Ram Gowrisankaran, 6 January 2006

We reiterated coverage of U.S. Bancorp with an Outperform investment rating and a 12-month price target of $35.00 per share.

U.S. Bancorp is a financial and bank holding company with $207 billion in assets (in the third-quarter of 2005) based in Minneapolis, Minn.

The company estimates mid-teen growth in payment services and plans to double revenues over the next four to five years. Payment services generate approximately 22% of revenues, up from 17% in the first quarter in 2003.

U.S. Bancorp's earnings mix includes a growing proportion of earnings from higher price-to-earnings businesses, yet the stock trades at a discount to the large-cap bank peer group.

Given its low efficiency ratio (43.9%) and peer-low cost of interest-bearing deposits (1.79%), U.S. Bancorp is a low-cost provider. The company competes on price and maintains peer-high profitability metrics. The return on average assets and the return on average equity are 2.23% and 22.8%, respectively.

U.S. Bancorp targets a return of 80% of earnings to shareholders through repurchases and dividends. Management believes that it has sufficient deposit funding and prefers not to pay up for excess deposits. The company emphasizes customer satisfaction and net new checking accounts.

Our price target assigns a 13.3x multiple to the company's 2006 earnings, implying expansion from the 12.4x multiple currently accorded to 2005 earnings. Our price target implies a 19.5% investment return, including the stock's 4.34% dividend yield.

U.S. Bancorp currently trades at 12.4x and 11.6x our respective 2005-2006 operating earnings-per-share estimates of $2.46 and $2.63 and 4.63x tangible book value, a slight discount to the large-cap peer group.
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