Comerica Inc. gained a "buy" rating from Legg Mason Wood Walker Inc. on Thursday - and could have gained a higher rating if its stock were not already soaring.
The Baltimore-based financial services firm added Comerica, Fleet Boston Financial Corp., and Firstar Corp. to its research coverage. The initial rating for Fleet Boston was a "strong buy" while Comerica and Firststar achieved only "buy" ratings from analyst Christopher M. Mutascio, due to their pricey stocks. "Comerica generates impressive fundamentals' " Mr. Mutascio said in his report. He praised the management team, and noted the bank's high-quality earnings from diverse revenues, efficiency, and "superb credit culture." Legg Mason expects Comerica to earn $4.59 per share this year and $5.10 in 2001.
Because asset quality has emerged as a major concern among investors in banking stocks, Mr. Mutascio argued that Comerica is especially attractive. The analyst wrote that despite a high concentration of commercial loans - which results in higher nonperforming assets for most banks, as consumer loans are charged off faster - Comerica's 10-year average ratio of nonperforming assets to assets is only 1.15%. Legg Mason calculates an average of 1.53% for the group of traditional banks with more than $8 billion in market capitalization. Comerica's current rate of nonperforming assets is 0.67%.
Mr. Mutascio sees a slight risk in balance sheet liquidity, saying it has "very little flexibility in funding new loan growth."
Shares of Comerica rose 43.75 cents, or 0.8%, to $55.4375 on Thursday, a "significant run-up" from its recent low of $44.812 on June 16, Mr. Mutascio noted. His target price is $64, and he would give the company a more aggressive rating if shares were trading at around $50 he said.
Joseph Duwan of Keefe, Bruyette & Woods Inc. said that Comerica has "reached its upside potential." He lowered his rating on Monday to "outperform" from a first-rate "buy." Michael A. Plodwick, at Lehman Brothers, has a "hold" on Comerica shares, even though he raised his target price to $62.50 from $47 on Aug. 9. "They are the best in what they do," but the shares are too expensive compared with Comerica's peers, he said.
Similar concerns kept Mr. Mutascio from issuing a top rating for Firstar, which closed down 6.25 cents, or 0.26%, at $23.6875 on Thursday. Mr. Mutascio's target price is $28. Mr. Mustacio said he is focusing his attention on banks that take in above-peer revenues "while maintaining strong balance sheets," and that "Fleet Boston is one such institution."
"The merger between Fleet Financial and Bank Boston has created a super-regional powerhouse with no over-reliance on any specific business," his report stated. He also pointed out FleetBoston's "dominant deposit market share position in New England of 28%" and the bank's good position in high-growth business lines like capital raising, market access, and equity ownership, which account for 27% of total revenues. His EPS estimates are $3.74 this year and $3.75 for 2001.
Fleet Boston was selling at $39.4375, up 37.5 cents, or 0.96% in Thursday's trading. Legg Wood's target price is $52, based on a 14 times price-earning multiple.
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