Shares of Comerica Incorporated (CMA) have recorded a solid year-to-date return of 46.4%. Impressive organic growth, strong capital deployment activities and continuous improvement in credit quality were the driving factors behind this growth story.
However, we are not confident that these factors will further strengthen down the road as there will be considerable pressure on its bottom line owing to the sluggish economic recovery and stringent regulatory requirements.
After analyzing the company’s fundamentals following the third-quarter 2013 earnings release, we would suggest to stay invested in it. However, adding fresh shares of Comerica to your investment portfolio may not be a good idea given the expected headwinds.
Why This Stance?
Comerica’s third-quarter 2013 earnings per share of 78 cents beat the Zacks Consensus Estimate by 7 cents. Also, earnings came in 2 cents higher than the prior-quarter earnings.
Better-than-expected results were driven by higher non-interest income and lower non interest expense, partly offset by a fall in net interest income. Moreover, capital ratios and credit quality were impressive and reflected the company’s financial strength.
Comerica’s capital deployment activities reflect its efforts towards enhancing shareholder value. Apart from the regular payment of quarterly cash dividend, the company has an effective share repurchase program in place. Notably, for the quarter ended Sep 30, 2013 the share repurchases, combined with dividends resulted in a total payout of about 70% of net income to shareholders.
However, Comerica’s bottom-line growth is expected to be sluggish in the next few quarters. Increasing competition has lead to a shift in the portfolio mix towards lower yielding loans and lower reinvestment rates for the securities portfolio, thereby affecting net interest margin. Moreover, loan growth is expected to be modest reflecting lower demand due to the economic uncertainty.
The company has seen a mixed track record when it comes to estimate revisions and the Zacks Consensus Estimate has not been in trend either. As a result, the company currently carries a Zacks Rank #3 (Hold). Over the last 30 days, the Zacks Consensus Estimate for 2013 remained stable at $2.97 per share, while for 2014, it declined nearly 1% to $2.93 per share.
Other Stocks to Consider
If you are interested in the banking sector, you may consider a few better-ranked stocks like First Interstate Bancsystem Inc. (FIBK), German American Bancorp Inc. (GABC) and Mainsource Financial Group (MSFG). All these stocks carry a Zacks Rank #1 (Strong Buy).