Why Keycorp, the Beaten Down Stock, Is a Good Buy at This Level?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Banks took the worst hit in the financial crisis of 2008-2009 when it came to light that they did not adhere to established standards for loan underwriting and their exotic and creative products turned out to be nothing more than greed-oriented fancy schemes.

However, after three years and government bail-outs and some restructuring, some welcome stories are unfolding in the banking sector, particularly in regional banks. KeyCorp (NYSE: KEY), the holding company for KeyBank National Association and some other subsidiaries stand out among its peer as it seems to have come out of the doldrums and is presenting a brilliant investment opportunity. With the stock trading at a significant discount to its book value, there is a bargain out there for short term as well as long term investors.

A little bit of history

KeyCorp is a 160 year old Cleveland –based company with business in 14 states. It provides services such as retail and commercial banking, investment management, commercial leasing and consumer finance and investment banking products through two segments: Key Community Bank and Key Corporate Bank. As of December 2011, the company had 1,058 full-service branches, offices and a call center along with 1,579 ATMs across 15 states.

The bank was hit hard during the financial crisis and had to take loan charge-offs to the tune of $2.3 billion in 2009 and another $1.6 billion in 2010. Under the government bailout plan KeyCorp received a sum of $2.5 billion against issue of Fixed-Rate Perpetual Preferred Stock, Series B.

During 2008-2009, the bank made drastic reductions in the quarterly dividend, which went down from 37.5 cents per share in May 2008 to 1 cent in May 2009. However, since May 2011, the company has been increasing its cash dividend payout and has been paying 5 cents per share since May 2012.

In March 2010, the company repurchased $2.5 billion of Fixed-Rate Perpetual Preferred Stock, Series B issued to the U.S. Department of the Treasury, following the completion of $625 million common stock offering and issuance of $1 billion debt. In March 2011, KEY completed another common equity offering of 4.1 million shares at a price of $43.00 per common share and collected $176.3 million for repayment of debt raised for capital projects including the acquisition of Alberta EnviroFuels. The two instances of capital dilution did not go well with the investors and the stock fell by 6.14% between March 4 and March 25, 2011. Since then, the stock has barely managed to appreciate by 1.38% in the last 20 months or so, touching a high of $9.12 and a low of $5.71 (September 23, 2011).

The road ahead

The stock has performed well over the last three years and appreciated by almost 60%.

<img src="/media/images/user_14377/1_10_large.png" />

However, in the last one year, it has fared poorly as compared to its competitors, Huntington Bancshares (NASDAQ: HBAN), Zions Bancorporation (NASDAQ: ZION), First Republic Bank (NYSE: FRC) and M&T Bank (NYSE: MTB).

<img src="/media/images/user_14377/2_7_large.png" />

While three of them, MTB, ZION and HBAN showed double digit appreciation and FRC appreciated by 9.16%, KEY could only manage 6.30%.

However, what should be of greater interest to investors is that whereas M&T is trading at $103.24, which is a huge premium to its book value of $71.20 per share (most recent quarter). KeyCorp is trading at $8.84, a sizeable discount to its book value of $10.64 (most recent quarter). First republic, on the other hand, is trading at $34.66 with a book value of $21.48. (Source: http://finance.yahoo.com/ )

Moreover, we see a good momentum in KEY. At $8.84 KEY is trading above all its simple moving averages: 

<img src="/media/images/user_14377/3_4_large.png" />

On the other side, while KeyCorp has been beating earnings forecast by good margins in the last four quarters, there are some mixed signals as well.

<img src="/media/images/user_14377/4_2_large.png" />

    Source: Nasdaq

There has been a significant drop in revenues, which have been decreasing every year for the last five years – down from $7.58 billion in 2007 to $4.70 billion in 2011. On the other side, diluted EPS has been increasing since 2008.

<img src="/media/images/user_14377/5_large.png" />

Financials apart, the outlook for KeyCorp is promising when we see that there has been a significant drop in non-performing assets – down from 3.68% of total loans in third quarter 2009 to 1.27%. Other positives include a 5% growth in loans in the third quarter and with restrictions on dividends and stock buybacks removed, KeyCorp has been increasing shareholder value by repurchasing its shares at below tangible book value and increasing dividend payouts and returning cash to shareholders.

All indications are that in the short-term, KeyCorp will at least touch its book value, an appreciation of over 20%. In the long-term, it may follow its competitors and trade at a premium to its book value.


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