Comerica Inc. (CMA) reported its first quarter 2010 earnings on April 21, significantly below the Zacks Consensus Estimate. The company reported a net loss attributable to common shareholders of $71 million or 46 cents per share. Adjusted loss was 57 cents per share. The company was expected to report a loss of 28 cents, according to the Zacks Consensus Estimate.
Though results were below the Zacks Consensus Estimate, investors were encouraged by the repayment of the entire $2.25 billion of bailout money it received from the government for its participation in the Troubled Asset Relief Program (TARP) at the height of the credit crisis. This action has freed the regional bank from government involvement in its affairs and pay restrictions. Wall Street has had sufficient time to absorb the news, and analysts have responded positively.
The subsequent analyst estimate revisions and Zacks ratings for both the short-term and the long-term outlook for the stock are detailed below.
Earnings Report Review
The payment of dividends on the preferred stock issued to the U.S. Treasury under its Capital Purchase Program significantly impacted Comerica’s results. Excluding preferred dividends, the company reported a profit of $52 million, versus a net loss of $29 million in the prior quarter.
Credit metrics improved during the quarter, with significant declines in net charge-offs and provision for loan losses. The company also reported an increase in interest margin in the quarter.
The repayment of TARP loans followed Comerica’s completion of an $880 million common stock offering earlier in March 2010. Comerica funded the repayment with a combination of cash from its corporate fund and a sale of common stock. Currently, the Treasury is also auctioning Comerica’s warrants.
(Read our full coverage on this earnings report: CMA Posts Loss, Provisions Fall)
Earnings Estimate Revisions – Overview
Following the earnings release, estimates have moved up significantly. The estimate revision trends and the magnitude of such revisions justify the strength in the stock following its repayment of the bailout money. However, this is already factored into the current valuation.
Additionally, a number of bearish factors, including an earnings miss, continue to discourage investors from buying the stock.
Agreement of Estimate Revisions
Of the 21 analysts covering the stock, 11 have raised their estimates for FY2010, 1 analyst revised lower, while the rest kept their estimates unchanged. For FY2011, 20 analysts have raised the estimates while 2 have lowered them. This revision clearly depicts the positive sentiment over the full repayment of the TARP money and the improvement in credit metrics during the quarter.
Magnitude of Estimate Revisions
Estimates for FY2010 shot up ninefold — from 5 cents to 45 cents — since the earnings announcement. Estimates for FY2011 also moved up from $2.03 to $2.31.
Comerica in Neutral Lane
While the repayment of the bailout money is encouraging and — following the earnings release — around 50% of the analysts covering the stock have made upward revisions to their estimates, we think that there are a few things regarding the company’s operating performances that are on the downside. This includes the company’s significant exposure to the riskier areas, commercial real estate markets and a lack of loan growth and fee income.
Though Comerica is trying to diversify its geographical footprint, it still derives a significant part of its total revenue from the Midwest markets, especially Michigan, where the economic environment has continued to worsen for the past few years. This has negatively impacted its results, a trend that is anticipated to continue given the stressed economic conditions in this region.
Loan growth has clearly moderated over the past year, and growth in fee income remains restricted. Given the sluggish economic recovery, we do not expect any significant improvement in these categories. This is also reflected in the company’s guidance for the full year, where it expects a low single-digit growth in loans and approximately flat to low single-digit decline in non-interest income compared with 2009.
We believe that there is a lack of a positive catalyst to the share price in the short term following the TARP loan repayment. As such, Comerica shares are maintaining a Zacks #3 Rank, which translates to a short-term ‘Hold’ recommendation.
Also, considering the drawn-out recovery of the economy around Comerica’s footprint, we have a long-term “Neutral” recommendation on the shares.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “CMA”
Zacks Investment Research
