"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
- Wells Fargo's (WFC) 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) 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) 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) 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%.
That would make for earnings 31% higher than Mutascio's 2014 estimate, and 24% higher than the consensus estimate. "We would have to shock our EPS model by reducing the company's operating efficiency ratio to 58.3% for the full year 2014 in order to generate EPS of $1.19 -- all else being equal," Mutascio said. That efficiency ratio would be a very tall order for KeyCorp. Then again, KeyCorp CFO Dan Poston said during the bank's first-quarter earnings call on April 13 that "we expect our efficiency ratio to approach 60% at the end of the year." KEY data by YCharts
Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn