After A 12% Drop Since June 1, Is Comerica Stock Still Pricey?

[Updated 06/23/2021] Comerica Group Update

Having gained close to 150% since the March 23 lows of last year, at the current price of $71 per share, we believe Comerica Incorporated Stock (NYSE: CMA) is trading above its near-term potential. Comerica has seen its stock rally from $27 to $71 off the 2020 March bottom compared to the S&P which moved around 90% – the stock is leading the broader markets by a considerable margin and has gained 27% YTD. That said, the company has reported a drop in revenues over the recent quarters on a year-on-year basis – the top line has fallen 12% y-o-y to a consolidated figure of $2.9 billion for the last 4 quarters. However, CMA stock has gained 79% over the last twelve months. Hence, there is a mismatch between CMA’s stock growth and revenues. The impressive stock rise was driven by consecutive earnings beats over the last four quarters and an overall positive outlook toward U.S financial stocks. That said, its revenues are likely to see stagnant growth in the current year and the market has corrected some of the stock value over the past few days – CMA stock has lost around 12% since June 1.

Comerica mainly has three businesses – commercial bank, retail bank, and wealth management, out of which commercial bank contributed close to 75% of the total revenues. The company is heavily dependent on net interest income (NII) and is very sensitive to changes in interest rates. The NII suffered in 2020 due to the lower interest rate environment – revenue share decreased from 70% in 2019 to 66% in the year. It was partially offset by positive growth in the fee income. Further, the NII decreased by 14% y-o-y in the first quarter of FY2021 and is likely to suffer in the subsequent quarters as well. This is because the low-interest rates are unlikely to see an immediate revival to the pre-Covid-19 levels. Overall, Comerica’s revenues in FY2021 are likely to see meaningful growth. Additionally, Comerica’s P/E multiple has changed from just below 21x in FY 2017 to around 17x in FY 2020. While the company’s P/E is just below 22x now, there is some scope for a downside when the current P/E is compared to levels seen in the past years – P/E multiple of around 17x at the end of 2020. Our dashboard Buy Or Fear Comerica Incorporated Stock? provides the key numbers behind our thinking.

[Updated 06/01/2021] At $78, Comerica’s Stock Is Quite Expensive

After a 180% rally since the March 23 lows of the last year, at the current price of $78 per share, we believe Comerica Incorporated Stock (NYSE: CMA) is expensive. Comerica, the largest U.S. commercial bank, has seen its stock rally from $27 to $78 off the March 2020 bottom compared to the S&P which moved around 90% – the stock is leading the broader markets by a considerable margin and is trading 22% above its pre-Covid-19 peak. That said, there is a mismatch between CMA stock’s growth and revenues. The bank has posted lower revenues over the recent quarters on a year-on-year basis – the top line has fallen 12% y-o-y to a consolidated figure of $2.88 billion for the last four  quarters. Despite this, CMA stock has gained 116% over the last twelve months. This could be partially attributed to an earnings beat in each of the last four quarters and partially to an overall positive outlook toward the financial stocks – CMA stock has gained 41% YTD.

Comerica’s stock has surpassed the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. This seems to make it expensive as, in reality, revenues are unlikely to see a significant boost as compared to the last year.

While the company’s total revenues fell around 13% from $3.3 billion in 2018 to about $2.9 billion in 2020, it translated into a 62% decrease in the net income figure. The unusually high drop in the net income was due to significantly higher provisions for credit losses in 2020 – from -$1 million in 2018 to $537 million in 2020. Further, the non-interest expenses as a % of revenues increased from 53.9% to 61.3%. Overall, this reduced the net income margin from 37.1% to 16.3% in 2020.

Although CMA has seen negative growth in revenue and earnings over 2018-2020, its P/E multiple has increased. We believe the stock is trading above its near-term potential and has some downside, after the recent rally and potential weakness from a recession-driven by the Covid outbreak. Our dashboard Buy Or Fear Comerica Incorporated Stock? provides the key numbers behind our thinking.

Comerica’s P/E multiple has changed from just above 9x in FY 2018 to around 17x in FY 2020. While the company’s P/E is around 24x now, there is some scope for a downside when the current P/E is compared to levels seen in the past years – P/E multiple of around 9x at the end of 2019 and 17x at the end of 2020.

So Where Is The Stock Headed?

Comerica reported total revenues of $2.9 billion in 2020 – down 13% y-o-y. This was mainly driven by an 18% y-o-y drop in net interest income (NII) due to the lower interest rate environment. Notably, CMA is very sensitive to movement in interest rates, as the NII contributes close to 70% of the bank’s revenues. That said, the low-interest-rate environment is unlikely to see an immediate revival to the pre-Covid-19 levels, hurting the net interest income. However, some improvement in the outstanding loan balances driven by a recovery in the consumer spending levels will likely offset some of its negative impacts. Overall, Comerica’s revenues in FY2021 are likely to remain around the 2020 figure. The stagnant growth in CMA’s revenues is likely to serve as a reality check for the investors, negatively impacting its stock price.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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