Insights

This Warren Buffett Stock Is Starting to Look Cheap

If there’s one thing you can say about many longtime Warren Buffett stocks in Berkshire Hathaway’s large equities portfolio, it’s that many of them are built to last. They have resilient balance sheets that can stomach a recession and then take advantage of periods of growth, as well.

After all, Buffett often says his goal is to buy stocks and never sell them. Here’s one Buffett stock that’s rock solid right now and starting to look cheap.

A great regional bank

Buffett and Berkshire first bought stock in the $591 billion asset regional-bank U.S. Bancorp (NYSE: USB) in 2007. Now it’s the 10th largest position in Berkshire’s nearly $337 billion stock portfolio. As Buffett was selling lots of his bank holdings early in the pandemic, he only trimmed a little off of U.S. Bancorp, which appears to be his large regional bank of choice.

U.S. Bancorp reported solid results in the second quarter of the year, reporting a return on tangible common equity of 20.5%, excluding costs related to U.S. Bancorp’s pending acquisition of the U.S. subsidiary of Mitsubishi UFJ Financial Group. U.S. Bancorp plans to close this acquisition before the end of the year.

U.S. Bancorp grew total loans in Q2 by 3.6% from the first quarter, driven by nearly 7% higher commercial-loan balances. Net interest income, the profit the bank makes on loans, securities, and cash after funding those assets, grew nearly 8.3% from the first quarter.

U.S. Bancorp also saw fee income — which many banks are taking big hits on this quarter — fall off modestly, as the bank’s payments business grew revenue by nearly 10% on a year-over-year basis. Merchant-processing revenue came in 13.6% higher, and corporate-payments revenue jumped nearly 25% year over year.

The bank continues to see opportunities in the payments space because half of its payments customers don’t have a business-banking product and more than 71% of its business-banking customers don’t have a payments product. U.S. Bancorp’s CEO, Andy Cecere, said further integrating business-banking and payments capabilities is “one of my top priorities.” U.S. Bancorp was an early adopter of real-time payments capabilities and says that real-time payments transactions among its customers have been 10 times higher this year, compared to 2020.

Strong credit and an attractive valuation

U.S. Bancorp has long been known as one of the strongest underwriters in the banking industry. During the peak of loan losses in the Great Recession, net charge-offs, which is debt unlikely to be collected and a good indicator of loan losses, peaked at about 2.6% in the first quarter of 2010. That’s elevated, but remember that the Great Recession wiped out many banks completely.

As one analyst on U.S. Bancorp’s recent earnings call pointed out, the bank is the most conservative bank in the industry in terms of bond spreads and credit ratings. And credit quality has stayed strikingly strong. The bank’s net charge-off rate at the end of Q2 sat at 0.2% of average loans, while non-performing assets also remained quite low.

With the stock down more than 17% this year, U.S. Bancorp also trades at a very reasonable valuation from a historical standpoint. It trades at nearly 260% to its tangible book value, or net worth — which is a very strong valuation in the industry — but has often traded higher in the past.

USB Price to Tangible Book Value data by YCharts.

Why U.S. Bancorp stock looks cheap

Economic uncertainty has resulted in a sell-off of bank stocks this year. But U.S. Bancorp has long been one of the more conservative underwriters, and all banks should benefit — at least a little bit — from rising interest rates. Furthermore, U.S. Bancorp continues to make good progress on its payments capabilities and is about to get a whole new slate of business-banking customers in California, once it completes the acquisition of Mitsubishi’s U.S. subsidiary.

With a historically low valuation, strong track record when it comes to credit, and a strong business, U.S. Bancorp will likely eventually trade higher.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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