This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

KeyCorp Run-Up Is Unjustified, Says KBW

NEW YORK ( TheStreet) -- The recent run-up in KeyCorp's (KEY - Get Report) stock price doesn't make much sense, according to KBW analyst Christopher Mutascio.

KeyCorp's shares closed at $10.23 Tuesday, returning 22% this year, outperforming the performance of the KBW Bank Index (I:BKX), which was up 14% year-to-date through Tuesday's close at 58.28.

The shares have also outperformed the KBW bank index since Feb. 14, the day before Mutascio took over KBW's coverage of the bank, with an "underperform" rating and a price target of $9.00. Since the market close on Feb. 14, KeyCorp's stock has returned 8%, while the KBW Bank Index is up 5%.

Shares of KeyCorp of Cleveland trade for 10.7 times the consensus 2014 earnings estimate of 96 cents, among analysts polled by Thomson Reuters.

"It seems to us that the market is implying that: 1) our EPS estimates are too low, 2) investors are more willing to apply a premium P/E multiple to the shares than we are, or 3) a combination of both," Mutascio wrote.

Mutascio estimates KeyCorp will earn 91 cents a share during 2014. "If you assume investors require a 15%-20% upside from today's share price in order to obtain an adequate return over the next 18 months, then it implies a target price for KEY of approximately $12 per share," he wrote.

Based on the higher 2014 consensus estimate of 96 cents, a price of $12 for KeyCorp's stock would make for a forward price-to-earnings ratio of 12.5, rising to 12.9 if 2014 EPS ranges from 91 cents to 96 cents. According to Mutascio, "that seems like an awfully high P/E multiple for a bank expected to generate a [return on average assets, or ROA] of less than 1.0% and a [return on tangible equity, or ROTE] of less than 9.0% based on the current EPS estimates."

KeyCorp's first-quarter ROA was 0.99%, while its return on average tangible common equity (ROTCE) was 9.12%. Here's how the market's apparent logic for valuing KeyCorp's shares, according to Mutascio, would stack up for four other large regional banks, all of which are expected to be more profitable than KeyCorp during 2014:
  • Wells Fargo's(WFC - Get Report) first-quarter ROA was 1.41% and its ROTCE was 17.76%. The shares closed at $38.40 Tuesday, trading for 10.1 times the consensus 2014 EPS estimate of $3.81. That's lower than KeyCorp's forward price-to-earnings multiple, and probably reflects the political and regulatory "target on the back" for the largest U.S. banks. KBW is ahead of the consensus, with a 2014 EPS estimate of $3.93. Applying the 12.9 forward P/E multiple discussed above to KBWs 2014 EPS estimate would lead to a price target of $51 for Wells Fargo, for upside of 33%.
  • U.S. Bancorp(USB - Get Report) of Minneapolis achieved a first-quarter ROA was 1.65% and its ROTCE was a whopping 23.79%. The company has consistently been the best earnings performer among the 24 components of the KBW Bank Index through and after the credit crisis. The shares closed at $33.15 Tuesday, trading for 10.2 times the consensus 2014 EPS estimate of $3.24. It is remarkable to see U.S. Bancorp trading at a lower forward P/E than KeyCorp. Based on a multiple of 12.9 to KBW's 2014 EPS estimate of $3.25, USB would have a price target of $42, for potential upside of 27% from Tuesday's closing price.
  • For BB&T(BBT - Get Report) of Winston-Salem, N.C., the first-quarter ROA was 1.11% and the ROTCE was 8.25%. The shares closed at $31.51 Tuesday, trading for 10.2 times the consensus 2014 EPS estimate of $3.10, which is also KBW's estimate. Applying the multiple of 12.9 to the 2014 EPS estimate would leave a price target of $40, for potential upside of 27%.
  • Fifth Third Bancorp(FITB - Get Report) of Cincinnati has a first-quarter ROA of 1.34% and a ROTCE of 15.23%. The shares closed at $17.51 Tuesday, trading for 10.1 times the consensus 2014 EPS estimate of $1.73. Applying the multiple of 12.9 to KBW's 2014 EPS estimate of $1.77 would lead to a price target of $23, for upside potential of 31%.

So all four of these banks are trading at lower multiples to consensus forward earnings estimates right now, and three of the four have been much more profitable than KeyCorp. Mutascio's analysis emphasizes just how much of a bargain investors are looking at in shares of U.S. Bancorp and Wells Fargo.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BBT $35.40 0.07%
FITB $18.44 0.74%
KEY $12.46 1.40%
WFC $50.58 1.20%
USB $42.96 0.64%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs