Banking company Comerica is taking Wall Street by surprise today, falling to $38.37 and marking a -7.5% change compared to the S&P 500, which moved -1.0%. CMA is -25.61% below its average analyst target price of $51.57, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Comerica has underperfomed the S&P 500 by -54.0%, moving -40.0%.
Comerica Incorporated, through its subsidiaries, provides various financial products and services. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Comerica's trailing 12 month P/E ratio is 4.0, based on its trailing EPS of $9.58. The company has a forward P/E ratio of 6.3 according to its forward EPS of $6.06 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 14.34, and the average for the S&P 500 is 15.97.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Comerica market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing Comerica's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.52. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Comerica's free cash flow, which was $717.0 Million as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $1.07 Billion and they've been growing at an average rate of 0.0%. CMA's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 6.7% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Comerica's P/B ratio of 0.97 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Finance sector was 1.57 as of the first quarter of 2023.
Since it has a very low P/E ratio, an exceptionally low P/B ratio, and irregular cash flows with a flat trend, Comerica is likely undervalued at today's prices. The company has mixed growth prospects because of a PEG ratio of less than 1 and average net margins with a stable trend. We hope you enjoyed this overview of CMA's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.