Don’t Jump Yet, Comerica Investors
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s hard to imagine a 26% jump in earnings year-over-year could be anything but good news. But a closer look into Comerica’s (NYSE: CMA) recently announced Q1 financial results exposes a few less-than-desirable factoids for the commercial lender.
On the upside of course is the jump in earnings – to $130 million from $103 million in Q1 of 2011. That equates to $0.66 a share vs. $0.57 a share last year, and handily beat analyst guesstimates of $0.55 for the quarter. But this is yet another area it's worth taking a moment to peel back a few layers before getting too giddy. Last year’s $0.57 a share included a $0.12 a share charge for restructuring and costs associated with Comerica’s purchase of Sterling Bancshares last summer. When you add the one-time hit on earnings back into the mix, Q1 of 2012 dosn't look quite so rosy.
Another key component of today’s announcement is a double-edged sword. On the one hand it’s great to see Comerica improving the credit-worthiness of their loan portfolio – just as was the case with Wells Fargo (NYSE: WFC) and Citi (NYSE: C) yesterday, among others. This seems to be a trend and is a real positive for the industry in particular and the economy as a whole. However the sharp end of this particular blade was the dramatic drop in loan provision over 2011 and its impact on earnings. The $23 million the bank set aside for iffy loans this past quarter was down from $49 million last year. That’s $26 million that essentially falls right to the bottom line – and isn't the result of increased revenue from core banking activities. Interestingly enough, the provision actually rose from the previous quarter's (Q4of '11) mere $19 million.
Now, is that a bad thing? Of course not, strengthening the bank’s loan portfolio quality is just sound business practice and good for investors. But it would sure be nice to see a significant increase in revenues along with what amounts to an accounting maneuver – a legally required one, but an accounting maneuver nonetheless.
In fact Comerica’s earnings challenges were the impetus for Moody’s to recently downgrade the bank's (senior) debt rating, citing concerns over profit potential given the low interest rate environment and cost constraints. Ouch.
So how did the bank do in their core banking lines – in Comerica’s case, primarily commercial loans? Growth of 1% overall and 3% in the commercial loan division. Now, that's better than the proverbial sharp stick, but not exactly awe inspiring given the results of the aforementioned Wells and Citi, among others in the industry.
Yeah, it’s nice Comerica is going to bump their dividend from the current 1.25% and buy back some stock, that’s always a good thing. But even with these moves there are better investment alternatives in the banking industry right now.
Though reasonably priced based on a price-to-book ratio basis, Comerica’s recent rise has placed the company near the top of the expensive list based on earnings multiples compared to their brethren. Wells? Citi? 25% and 35% less than Comerica, respectively. Today’s jump in share price doesn’t knock Comerica out of the investor ballpark, but there are certainly better seats available – and for less.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.