2023-08-30 04:41:25 ET
Summary
- Comerica stock once again gets Strong Buy rating as in early June.
- Positives: dividend yield above 6%, capital strength, share price vs 200 day SMA, earnings YoY growth, valuation below sector average.
- Risk of exposure to office loans is minimal compared to overall loan portfolio.
- Downside risk fueled by new regulatory moves this week against regional banks has been analyzed also.
Research Brief
In today's analysis, I will be covering Comerica ( CMA ) , which is in the financials sector, and regional banks subsector.
Since my last strong buy rating in early June, the share price rose 7.87%.
Comerica - performance since last rating (Seeking Alpha)
Today, nearly 3 months later, I will be re-rating this stock using my updated rating methodology to see if anything changed.
The company had its most recent 2023Q2 quarterly earnings result on July 21st, and that will be the reference data used in some parts of today's analysis.
For readers less familiar with this company, which Wikipedia ranked #37 among the largest banks in the US , some relevant points to mention from their website are:
Roots go back to 1849, based in Dallas Texas but has offices in 17 US states, making new investments in mountain west region of US, $60B+ in assets, operates across multiple banking segments such as personal / business / commercial / wealth management.
A few key peers of this company include other regional banks with similar size ranking, such as First Horizon ( FHN ) based in Tennessee and New York Community Bancorp ( NYCB ) based in NY.
Research Methodology
To determine a holistic rating for this stock of buy, sell, or hold, I split my research into the following 5 categories: dividends, valuation, share price, earnings growth, capital strength.
Each category has equal weight. If I recommend the stock in at least 4 of 5 categories, it gets a buy rating. 3 out of 5 will get a hold rating, and below that earns a sell rating.
This process is aimed to simplify things, focus on financial fundamentals, and to analyze an equity from multiple angles.
Dividends
In this category, I will discuss whether this stock should be recommended for dividend-income investors, by analyzing official dividend data from Seeking Alpha.
As of the writing of this article, the forward dividend yield is 6.18% , with a payout of $0.71 per share on a quarterly basis, and an ex-date coming up in September, which could be an opportunity to take advantage of.
Comerica - dividend yield (Seeking Alpha)
In comparing the yield vs the sector average, this stock is above the sector average by almost 60%. I think that is a positive for the dividend investor to think about in terms of this stock vs the overall sector it is in, as the sector average is hovering just under 4% yield.
Comerica - dividend yield vs sector (Seeking Alpha)
Next, in comparing the current dividend to the last 5 years, this company has been on a steady uptrend when it comes to dividend growth. I think this is also a positive for dividend investors as it points to the historical capacity of this company to return capital back to shareholders, though not necessarily a guarantee of future dividends.
Comerica - dividend 5 year growth (Seeking Alpha)
Based on the evidence found, I would recommend this stock in the category of dividends. In the section on share price later on, I will show how annual dividend income can play a role in putting together my investment idea for this stock.
Valuation
In this category, I will discuss whether this stock presents an attractive valuation for investors who are value-oriented. To analyze this, I will use today's valuation data from Seeking Alpha and specifically the forward P/E ratio and forward P/B ratio.
This stock's forward P/E ratio shows the price being 6.04x forward earnings , which is 37.87% above the sector average that is hovering closer to 9.7x forward earnings. I am looking for a valuation in a range that is up to 30% to 40% below the average and up to 5% above average or in line with it. In this case, this stock is reasonably valued on price-to-earnings.
If it had been, say, 80% below the average, that would be concerning and would need further analysis as to what is behind such an overly low valuation compared to its sector.
Comerica - P/E ratio (Seeking Alpha)
This stock's forward P/B ratio shows the price being 1.08x forward book value , which is 8.38% above the sector average that is hovering around 1x forward book value.
My benchmark is a valuation in a range that is up to 30% below the average and up to 5% above the average or in line with it. In this case, this stock is reasonably valued on price-to-book value.
Comerica - P/B ratio (Seeking Alpha)
Since this stock is reasonably valued on both valuation ratios, I would therefore recommend it in the category of valuation, based on the evidence researched.
Share Price
In this category, I will decide if the current share price presents a value-buying opportunity or not, by using some simple charting tools.
First, I pulled the most recent YChart as of this article writing. It shows a share price of $47.02 and compares it to its 200-day simple moving average “SMA” of $54.54, tracked over the last year.
Then, I created a simple trade scenario in which my profit goal is a +10% return on capital invested.
I simulate buying a fictitious 10 shares at the current share price shown above, hold the shares for 1 year in which time I earn the full-year dividend income, and then sell the shares to generate a capital gain. This scenario assumes the SMA will go up by 10% in a year and that will be my target sell price.
The following spreadsheet illustrates this trade, which projects a +33.63% positive return. The two potential tax events to think about would be a realized capital gain and dividend income.
Comerica - trade simulation 1 (author analysis)
However, I also need to have a risk tolerance and plan for potential capital loss as well. In the following scenario, I plan for a -10% negative return on capital, which is my maximum risk tolerance.
The same goes as in the first trade however now I assume the SMA will drop by 10% in a year and this will be my sell price. The following spreadsheet illustrates this trade, which projects a +10.43% positive return. It does not achieve a capital loss, if I had bought at the current share price and sell at the target sell price in a year.
Comerica - trade simulation 2 (author analysis)
Because the two trading simulations met profit goal and remained within risk tolerance, I would recommend the current share price as a buying opportunity, considering it priced just right.
This investing idea, however, may not fit all investors' portfolio goals or risk tolerance, and should only be considered an oversimplified way to think about this stock as a long-term investment and in terms of potential gains as well as potential losses that could occur, by anticipating possible trends in the moving average.
Earnings Growth
In this category, I will analyze the earnings growth trend for this company over the last year, using data from the income statement on Seeking Alpha as well as the most recent company quarterly earnings release, presentation and commentary.
The first relevant item to mention in this section is solid YoY growth in net interest income, which is a positive sign considering that the elevated interest rate environment of the last year has not only been a tailwind to interest income but also interest expense such as interest paid on deposits as well as interest on funds banks borrow from each other and the Fed.
This rate environment I think will continue for a while as CME FedWatch predicts a 79% probability of rates staying the same after the next Fed meeting in September.
In this case, I think Comerica seems to have managed that spread effectively.
Comerica - net interest income YoY (Seeking Alpha)
It also has income diversification beyond just interest income, with non-interest income YoY growth showing good results.
Comerica - non interest income YoY (Seeking Alpha)
This has obviously been a tailwind to total revenue which also saw YoY growth:
Comerica - revenue YoY (Seeking Alpha)
The bottom line also had good Q2 results, with net income also seeing YoY growth vs the same quarter a year ago:
Comerica - net income YoY (Seeking Alpha)
One other relevant item, from their Q2 presentation, is a YoY growth in the loan book but also in the average yield earned on those loans, going from 3.64% to a whopping 6.18% by end of Q2 2023.
This is relevant since writing loans is a major income source for a regional banking group like Comerica, as it has substantial competition from other, bigger banking brands.
Comerica - loan growth YoY (Comerica Q2 presentation)
Comerica CEO Curtis Farmer shared my positive outlook in his Q2 commentary:
Our second quarter results were strong with earnings per share of $2.01, record average loans and our second highest quarter of noninterest income in history.
Based on the evidence, I would recommend this stock in the category of earnings growth.
Capital Strength
In this category, I will analyze the capital strength for this company using data from the company recent quarterly presentation and earnings release, that shows financial viability of this firm.
One metric I keep track of in this sector is the CET1 ratio, which is a regulatory item for banks to abide by, and Comerica with a CET1 of 10.31% is well above its regulatory minimum, as the chart shows.
Comerica - CET1 ratio (Comerica Q2 presentation)
The second item of importance to mention is this bank's liquidity profile. According to their own data below, at the end of Q2 they still had $43B in remaining unused liquidity capacity, and have the ability to tap into a variety of liquidity sources including the FHLB and Fed discount window, which is available to many banks.
This is in addition to cash coming in from new deposits with the bank.
Comerica - liquidity (Comerica - Q2 presentation)
Based on the evidence, I would recommend this stock in the category of capital strength.
Rating Score
Based on passing 5 of my 5 rating categories today, this stock once again earned a strong buy rating , maintaining its rating from early June. This rating is more bullish than the consensus from analysts and more bullish than the quant system, as shown by the graphic below.
Comerica - rating consensus (Seeking Alpha)
Risk to my Outlook
My bullish outlook on this stock could be impacted by: investor pessimism towards bank stocks due to recent media reports about this sector's exposure to certain commercial real estate "CRE" loan assets such as loans on office property, which has seen its challenges as workers shift to remote work opportunities.
Such investor & analyst pessimism is also fueled by reports like an Aug. 3rd article in Business Insider , which discussed the rise in delinquency rates among office loans.
According to the article:
Borrowers are struggling to repay under tighter financial conditions and waning demand for office space — and the downturn shows no signs of easing.
Kiran Raichura, deputy chief property economist for Capital Economics, said last month that office values were unlikely to rebound to their peaks for another decade or two, thanks to the rise of work from home.
Comerica is not immune to this risk or potential pessimism since part of its loan portfolio is tied to commercial real estate, so it is worth discussing.
What is relevant to mention is based on the company's own data its office exposure is only 7% of the overall "CRE" portfolio, and less than 2% of total loans. In addition, office loans only make up about 3% of "criticized" loans, or ones showing preliminary signs of higher risk.
Comerica - CRE portfolio (Comerica - Q2 presentation)
I am looking for banks that have ideally no more than 15% of their commercial portfolio tied to office loans, which I think is a reasonable risk level. In the case of Comerica, over 3/4ths of their commercial portfolio is tied to multi-family residential and industrial/storage properties.
Therefore, I think the evidence is in favor of Comerica in this case, so I don't think such investor pessimism would be justified when it comes to this specific bank, although perhaps understandably some concern for the sector overall.
Analysis Summary
To wrap up today's analysis, let's go over the key points discussed:
I am maintaining my strong buy rating from early June as even with my updated rating methodology and more detailed analysis, this time the stock continues to show reason for me to be bullish.
Its positive points included: dividends, valuation, share price, earnings growth, capital strength.
Headwinds: none significant to mention.
The risk of exposure to office property loans has been addressed, and deemed to be a minimal risk.
Concluding Thoughts and Downside Risk
This is another of the regional banking groups I have on my watchlist and continue to follow & analyze, now having gotten bullish ratings twice from me. Although I am not bullish on all regional banks, I do find hidden gems like this one that I want to share with my readers.
At the same time, investors should also take note of potential downside risk with this company. In my opinion, it will not necessarily be due to the financial fundamentals up until now but external factors like credit rating agencies (S&P, Moody's) lowering credit ratings for banks which they have done lately, and regulators imposing new rules, which can impact regional banks like Comerica as well.
Consider a new report on Aug. 29th by CNBC , discussing this Tuesday's news that regulators plan to force regional banks to issue more debt, as protection against potential failure.
The requirements will create “moderately higher funding costs” for regional banks, the agencies acknowledged. That could add to the industry’s earnings pressure after all three major ratings agencies have downgraded the credit ratings of some lenders this year.
It is media reports like these that may cause downward pressure on this stock price by concerned investors avoiding or getting out of regional bank stocks ahead of time, so the next month will be worth keeping an eye on.
My investing idea from this article already prices in a 10% drop in the 200-day SMA for this stock, as I have shown, however the following scenario is what a 20% drop looks like if buying at $47.02 and selling at 20% below the current SMA in a year which is $43.63. On a 10-share investment, it is loss of just over $5.
I recommend that readers conduct a risk tolerance scenario that factors in such potential drops in share price, and the impact of media stories, before considering where to put their capital, and not relying solely on one analysis.
For further details see:
Comerica: Maintain Strong Buy After Solid Q2 Results And Dividend Yield