Piper Jaffray Names US Bancorp Its 'Sleeper' Tax Cut Play

The tax bill signed into law by President Donald Trump will benefit some companies more than others, and analysts at Piper Jaffray identified a "sleeper pick" the firm said is flying under the radar: U.S. Bancorp (NYSE: USB)

The Analyst

Piper Jaffray's Kevin Barker upgraded U.S. Bancorp's stock rating from Neutral to Overweight with a price target boosted from $56 to $61.

The Thesis

When investors think of a company that will see outsized benefits from tax reform, U.S. Bancorp hardly comes to mind, Barker said in a note. (See the analyst's track record here.)

Investors may be overlooking the fact that the company has a lower tax rate versus its peers, but this is mostly due to U.S. Bank's heavy use of solar and wind tax credits as opposed to low-income housing credits, the analyst said. Under the new tax plan, the benefits U.S. Bancorp has been receiving will "remain largely intact."

In addition, the company as a "significant amount" of operating expenses associated with tax credit investing that could "go away," Barker said. 

The bank realized $698 million in tax credits in 2016 and simultaneously realized $672 million of expenses associated with those investments, of which $251 million was included in the bank's tax expenses, according to Piper Jaffray. 

"It is unclear how much of this expense is related to [low-income housing tax credits] or which portion would actually run off given the complexity of tax reform, but it does show a decline in expenses may offset some of the lost tax credits," Barker said.

"We also note the company would ultimately shift its investment strategy to another asset class that will generate an incrementally lower ROI and therefore limit the impact of tax credit run-off."

U.S. Bancorp's stock has lagged its regional bank peers by 4 percent since late November 2017. This creates a scenario where the stock's valuation is attractive and efficiency gains appear to be a near-term catalyst, Barker said. 

Price Action

Shares of U.S. Bancorp were trading higher by 0.2 percent Friday afternoon.

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