U.S. Bancorp stock (NYSE: USB) currently trades around $33 per share, around 47% below its level of approximately $63 on January 15, 2022 (pre-inflation shock high), and has the potential for sizable gains. U.S. Bancorp
Returning to the pre-inflation shock level means that USB stock will have to gain around 89% from here. However, we do not believe that will materialize anytime soon due to the tough macroeconomic conditions. Further, U.S. Bancorp’s valuation estimate is $44 per share. Hence, the price of $44 is more likely achievable in the near term.
Our detailed analysis of U.S. Bancorp’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply
- April 2021: Inflation rates cross 4% and increase rapidly
- Early 2022: Energy and food prices spike due to Russian invasion of Ukraine. Fed begins its rate hike process
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how USB stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
USB and S&P 500 Performance During 2007-08 Crisis
U.S. Bancorp stock declined from nearly $22 in September 2007 (pre-crisis peak) to $10 in March 2009 (as the markets bottomed out), implying USB stock lost almost 54% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $16 in early 2010, rising 59% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
USB Fundamentals Over Recent Years
U.S. Bancorp revenues increased from $22.9 billion in 2019 to $23.2 billion in 2020 due to higher mortgage banking and commercial products income, before decreasing by 2% in 2021. The top line improved 6% in 2022 to $24.2 billion due to improvement in the net interest income driven by loan growth and interest rate hikes.
Similarly, earnings decreased from $4.16 in 2019 to $3.06 in 2020 due to higher provisions for credit losses, before improving to $5.11 in 2021 because of credit reserve release. It was $3.69 in 2022.
With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe U.S. Bancorp stock has the potential for strong gains once fears of a potential recession are allayed.
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