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Consider Comerica for 2019

- By Alberto Abaterusso

One way investors can increase their odds of finding a bargain is by screening for companies based on earnings yield. A good benchmark to base this off os is the monthly spot rate on 20-Year High-Quality Market Corporate Bonds.

These bonds are fixed-income securities representing the corporate loan issued by triple-A, double-A and single-A rated publicly traded companies, which expire after 20 years.


The most recent observation from the Federal Reserve Bank of St. Louis on these financial instruments indicates a 4.77% monthly average spot rate. This means investors should look for stocks that have an earnings yield over 4.77%.

Since the earnings return is the inverse of the price-earnings ratio, one would need to search for stocks whose ratio is less than 20.96.

The result of my screening activities was Comerica Inc. (CMA), a Dallas-based bank that operates in North America and Mexico.

The stock has a price-earnings ratio of 11.28 compared to an industry median of 14.76 as of Jan. 21. The price-earnings ratio leads to an earnings return of nearly 9%, which is 423 basis points higher than the monthly average spot rate on the corporate bonds.

The bank has outperformed the S&P 500 by 16% over the last five years, when interest rates remained low. The stock is expected to continue beating the U.S. equities market despite the Federal Reserve raising the interest rate 25 basis points on Dec. 19.

The commercial bank has $70.82 billion in total assets, of which $12.2 billion is allocated for long-term investments.

The company's total assets and core operations produced total revenues of $3.33 billion and net income of $1.24 billion in 2018.

The annual sales turnover is a 7.4% year-over-year increase, pushing the annual average growth rate up to 1.6% for the past five years.

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The net margin is improving as well. Over the trailing 12 months through the fourth quarter of 2018, the ratio has risen 2,228 basis points to 36%.

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A hefty 70% of total assets is represented by net loans. Therefore, a tight monetary policy from the central bank should boost Comerica's bottom line as the cost of commercial loans will increase, but not enough to discourage investments. The pace of interest rate hikes is now expected to be less rushed as a result of slowing global growth and increased volatility in financial markets.

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Robust economic growth and encouraging data from the U.S. labor market caused the Federal Reserve to raise the target range for the federal funds rate by about 150 to 175 basis points to in 2018. Comerica's loan has not suffered from this shift in monetary polilcy as the average value of the loan decreased by only 0.2% to $48.8 billion in the last quarter of 2018 from $48.9 billion at the end of 2017.

The bank's deposits decreased 3.3% to $55.7 billion during the quarter.

In 2019, this trend should continue to favor shareholders as Comerica expects 4% to 5% upside in net interest income. The average loan is forecasted to rise 2% to 4% and the average deposit is expected to decline 1% to 2%.

A dividend increase must also be considered a possibility. The company is currently paying out 26% of net earnings in the form of a quarterly dividend of 60 cents per share. The distribution is leading to a forward dividend yield of approximately 3%.

Comerica was trading around $81.19 at close on Monday for a total market capitalization of $13.03 billion. The 52-week range is $63.69 to $102.66, the price-book ratio is 1.73 versus an industry median of 1.24 and the price-sales ratio is 4.28 versus an industry median of 3.41.

According to the Peter Lynch chart, the stock is priced fairly.

Disclosure: I have no positions in any security mentioned in this article.

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This article first appeared on GuruFocus.


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