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USB vs. BAC: Which Bank Stock is Better Ahead of Earnings?

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Key bank earnings that are scheduled for release this week and next will likely to provide a better understanding of the sector’s near-term prospects. At present, the central short-term concern for banks will be one-time U.S. tax charges, which may affect their full-year profits. However, a lower U.S. corporate tax rate is expected to favor profitability in the long run.

Encouraging economic environment, a low tax rate and high Fed rate hike prospects have clearly shifted attention to the bank stocks, which will kick-start the first-quarter earnings season. In this context, Bank of America Corporation (BAC - Free Report) and U.S. Bancorp (USB - Free Report) which are scheduled to report on Apr 16 and Apr 18, respectively, assume greater significance. Both banks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major stocks reporting earnings from Apr 16 to Apr 20 include The Goldman Sachs Group, Inc. (GS - Free Report) and UnitedHealth Group Incorporated (UNH - Free Report) .

Price Performance

Bank of America has gained 37.2% in the last one year and outperformed the broader industry that has moved up 22.3% over the same period. In comparison, U.S. Bancorp has not only underperformed the broader industry but also Bank of America, gaining only 2.5% over the same time frame.

Valuation

Compared with the S&P 500, the industry is clearly undervalued. This implies that the industry has upside potential for the near future. The industry has an average trailing 12-month P/B ratio – which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next – of 1.77, which is below the S&P 500’s average of 3.75. Hence, it might be a good idea to focus on stocks belonging to this particular industry.

Coming to the two stocks under consideration, with a P/B ratio of 1.91 U.S. Bancorp is undervalued than the S&P 500 but overvalued than the industry. However, Bank of America with a P/B ratio of 1.28 is less pricey compared to both the S&P 500 and the industry. 

Dividend Yield

U.S. Bancorp’s dividend yield over the last year is 2.34%, higher than the broader industry’s figure of 2.04%. With a dividend yield of only 1.57%, Bank of America shareholders earn a comparatively lower dividend yield than both its smaller competitor and the broader industry.

Return on Assets (ROA)

Return on assets (ROA) is one of the key financial ratios for banks as they rely heavily on their assets to create revenues. A positive ROA indicates that the company has reported gains from its assets for the period in question. Coming to U.S. Bancorp and Bank of America, ROA for the trailing 12-months (TTM) is 1.32% and 0.83%, respectively. U.S. Bancorp has a higher ROA than not only Bank of America, but also the industry, which has ROA of 0.99%.

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Bank of America has delivered positive surprises in three of the prior four quarters with an average earnings surprise of 8.8%. On the other hand, U.S. Bancorp has delivered positive surprises in all the prior four quarters with an average earnings surprise of 1.2%.

When considering Earnings ESP, U.S. Bancorp has an ESP of +0.56%, while Bank of America has an ESP of -0.37%. Then again, U.S. Bancorp’s earnings estimates for the current year have increased by 0.5% over the last 60 days, while the same metric for Bank of America has advanced by 0.8%. 

Conclusion

Our comparative analysis shows that Bank of America holds an edge over U.S. Bancorp, when considering valuations and price performance. Additionally, when we take a more comprehensive look at the companies’ previous earnings performance and estimate revisions, Bank of America is the better stock.

However, when considering return on assets and dividend yield, U.S. Bancorp holds an edge over Bank of America. What clinches the case in favor of U.S. Bancorp at this point of time is that it has a better ESP than Bank of America. This is why it may be a good idea to bet on U.S. Bancorp over Bank of America as both prepare to report earnings over the next few days.

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