Value Analysis of Key Every Investor Should Read

One of Wall Street's biggest winners of the day is Key, a regional banking company whose shares have climbed 4.0% to a price of $16.48 -- 21.78% below its average analyst target price of $21.07. The average analyst rating for the stock is hold. KEY may have outstripped the S&P 500 index by 3.5% so far today, but it has lagged behind the index by 14.7% over the last year, returning -34.1%.

KeyCorp operates as the holding company for KeyBank National Association that provides various retail and commercial banking products and services in the United States. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

Key's trailing 12 month P/E ratio is 7.6, based on its trailing Eps of $2.18. The company has a forward P/E ratio of 7.1 according to its forward Eps of $2.33 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the financial services sector has an average P/E ratio of 13.34, and the average for the S&P 500 is 15.97.

KEY’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Key, we obtain a PEG ratio of 10.06, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To better understand the strength of Key's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

  • 2021 operating margins: 42.4 %
  • 2020 operating margins: 27.5 %
  • 2019 operating margins: 33.4 %
  • 2018 operating margins: 35.7 %
  • Average operating margins: 34.7 %
  • Average operating margins growth rate: 10.0 %
  • Coefficient of variability (lower numbers indicate less volatility): 17.7 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Key's last four annual reports, we are able to obtain the following rundown of its free cash flow:

  • 2021 free cash flow: $1,087,000,000.00
  • 2020 free cash flow: $1,610,000,000.00
  • 2019 free cash flow: $2,821,000,000.00
  • 2018 free cash flow: $2,407,000,000.00
  • Average free cash flow: $1,981,250,000.00 %
  • Average free cash flown growth rate: -19.4 %
  • Coefficient of variability (the lower the better): 39.4 %

Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, KEY is in a position to do either -- which can encourage more investors to place their capital in the company.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Key has a P/B ratio of 1.0. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Financial Services sector, which stood at 1.95 as of the third quarter of 2022.

Key is by most measures undervalued because it has a very low P/E ratio, an exceptionally low P/B ratio, and a steady stream of strong cash flows with a downwards trend. The stock has mixed growth indicators because it has a an inflated PEG ratio and decent and consistent operating margins that are growing. We hope you enjoyed this overview of KEY's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.