Comerica Inc.: The Pandemic and its Value Implications
24 Pages Posted: 23 Mar 2022 Last revised: 30 Mar 2022
Abstract
This case follows a fictional hedge fund manager as she works to finalize an investment thesis on Comerica Incorporated to present to her manager, who is undecided as to whether the fund should buy (go long) or sell (short) the stock. Assessing Comerica's value and outlook is complex. She needs to have a view on Comerica's future earnings, which are clearly linked to the gravity and duration of the COVID-19 pandemic and the resiliency of the banking sector as a whole.This case is taught at Darden in a course on “Artificial Intelligence and the Future of Work”; it would also be well suited for in-person or online MBA courses in banking and financial markets, new technologies, or communication and crisis response.
Excerpt
UVA-F-1997
Rev. Nov. 1, 2022
Comerica Inc.: The Pandemic and Its Value Implications
Louise Green of New York-based hedge fund Ivy Road Advisors hung up the phone on July 21, 2020, having spent the last hour of her morning tuning into Dallas-based financial services company Comerica Incorporated's quarterly earnings call. At the time, Comerica had assets of $84 billion—ranking it in the top 40 of US banks. The earnings release came during an especially challenging time in the global economy, as the world was reeling from the spread of COVID-19, the deadly disease caused by the novel coronavirus, with no immediate hopes for a vaccine and sheltering-in-place offered as the best prescription for protection. COVID-19 was so rare as to be comparable in modern time only to the 1918 influenza pandemic.
Amid the uncertainty and economic fallout, the banking sector was not spared. The week prior, San Francisco-based bank Wells Fargo had announced its first quarterly loss since the global financial crisis, posting a net loss of $2.4 billion, equivalent to $0.66 a share and far exceeding the $0.20 per-share loss predicted by analysts. Comerica's stock, which was listed on the New York Stock Exchange (NYSE), had itself lost around 50% of its value in 2020, closing on July 21 at $34.93 per share. (See Exhibit 1 for Comerica's stock performance versus other regional banks and the S&P 500 Index.)
Comerica's quarterly revenue of $718 million ($471 million net interest income + $247 million total noninterest income), while a 15.8% decline from Q2 2019, beat analysts' average expectations by $26million. The company's quarterly adjusted earnings of $0.80 per share far exceeded the mean expectation of analysts who predicted $0.21 per share. This difference in the expected adjusted per-share earnings was due in part to lower provision for credit losses than analysts had predicted. Provisions in Q2 were $138 million, down from $411million in Q1. Despite the better than expected adjusted per-share earnings, one reporter wrote, “There's been no major changes to the consensus price target of $41.14, suggesting that the improved earnings per share outlook is not enough to have a long-term positive impact on the stock's valuation.” (See Exhibits 2 and 3 for Comerica's balance sheet and income statement.)
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Keywords: Comerica, COVID-19, coronavirus, pandemic, investment, banking, market analysis, stock
Suggested Citation: Suggested Citation
George (Yiorgos) Allayannis (Contact Author)
University of Virginia - Darden School of Business ( email )
Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)
HOME PAGE: http://faculty.darden.edu/allayannisy
Jenny Craddock
University of Virginia - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
Aldo Sesia
University of Virginia - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States