NEW YORK (TheStreet) -- With the prospect of higher interest rates around the corner, you will have to search long and hard these days to find a bank stock that is still cheap.
To that end, I won't put up an argument that Comerica (CMA) is undervalued. I do believe, however, that given Comerica's above-average loan growth and expense controls relative to Commerce Bancshares (CBSH) and Bank of the Ozarks (OZRK), Comerica can still outperform by accelerating its income in a relatively short period of time. The problem is that the Street already knows this.
Although Comerica's management was criticized last year for the bank's "asset-sensitive" business, which some believe made the bank too susceptible to low interest rates, the same reason is now being used for why these shares will go higher.
What bothers me is that despite these perceived drawbacks, these same analysts conveniently discount that Comerica had consistently beaten its quarterly estimates in areas like low credit costs and outperformed the likes of Wells Fargo (WFC) and Citigroup (C) in fee income growth. (Not to mention the drastic improvements seen in areas like non-performing loans.)
Friday, Comerica management will look to affirm the bank's solid direction when it reports fourth-quarter results. The Street will be looking for 74 cents in earnings-per-share on revenue of $619 million, which would represent a year-over-year revenue decline of 1.4%. Given the recurring theme of declining revenue I've seen from all of the big banks so far, this 1.4% decline would stand out as one of the best.
Given what has been a weak environment for interest rates, don't place too much confidence in the revenue metric. It's expected to be down throughout the entire sector. In the case of Comerica, with a sizable commercial loan book, investors should key on what management produces in areas like net interest margin (the metric that explains how well management has utilized capital relative to the bank's debt situation).
I don't believe Comerica's 2013 net interest margin output was ever as bad as some analysts made it out to be. While I agree there were reasons to be disappointed with the bank's performance in net interest income, it was nonetheless comparable to larger rivals like Bank of America (BAC). It also significantly outperformed Commerce Bancshares.
All told, while management has done well figuring out ways to beat its net interest income estimates, this is still one area where management will need to improve if these shares are to continue their ascent. If management is able to close the year out on a strong note with a "decent" rise in overall loan growth, I believe Comerica will embark on a clear path to exploit opportunities with higher rates.
The other reason is that unlike Citigroup or Wells Fargo (which Comerica has exceeded in overall loan growth), Comerica can boast about roughly 80% of its loan bookings being at variable rates. This is exceptional leverage. And I believe it's only a matter of time before these rates inch higher, which should deliver more profits to Comerica's bottom line.
With the better-than-expected results we've seen from Ford (F) and General Motors (GM), it doesn't appear as if the expected slowdown in U.S. auto sales is going to materialize. In fact, growth has picked up a bit in Europe and China. Given that Comerica has almost 10% of its loan booking to auto dealers, that part of its business should continue to trend higher.
All things considered, Comerica remains a top-notch bank with a growing presence in large markets like California and Texas. In many respects, the premium these shares carry relative to its peers presumes this fact. While I normally wouldn't encourage buying stocks at their 52-week highs, it's hard to not like Comerica's prospects given the expected improvements in U.S. interest rates.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.