What Value Should You Place On Comerica Incorporated (NYSE:CMA)?
Bank stocks such as CMA are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Emphasizing line items like book values, with the return and cost of equity, is beneficial for assessing CMA’s value. Below I will show you how to value CMA in a relatively useful and straightforward method.
View our latest analysis for Comerica
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. CMA operates in United States which has stringent financial regulations. Moreover, banks tend to not hold substantial amounts of tangible assets on their balance sheet. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
The Calculation
The central assumption for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.17% – 11%) x $47.31 = $2.93
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $2.93 / (11% – 2.9%) = $36.96
Combining these components gives us CMA’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $47.31 + $36.96 = $84.27
This results in an intrinsic value of $84.27. Relative to today’s price of US$83.55, CMA is currently trading in-line with its true value. This means CMA isn’t an attractive buy right now. Valuation is only one part of your investment analysis for whether to buy or sell CMA. Fundamental factors are key to determining if CMA fits with the rest of your portfolio holdings.
Next Steps:
For banks, there are three key aspects you should look at:
Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
Future earnings: What does the market think of CMA going forward? Our analyst growth expectation chart helps visualize CMA’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether CMA is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on CMA here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
