Yahoo Finance KeyCorp (NYSE:KEY) Is Trading At A 1.02% Discount
Valuing KEY, a bank stock, can be daunting since these financial companies have cash flows that are impacted by regulations that are not imposed upon other industries. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Looking at line items such as book values, along with the return and cost of equity, may be beneficial for estimating KEY’s value. Today we will look at how to value KEY in a fairly useful and simple approach.
View our latest analysis for KeyCorp
Why Excess Return Model?
Let’s keep in mind two things – regulation and type of assets. United States’s financial regulatory environment is relatively strict. Moreover, banks tend to not have substantial portions of physical assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Deriving KEY’s Intrinsic Value
The key belief for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.14% – 11%) x $14.4 = $0.37
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $0.37 / (11% – 2.9%) = $4.54
These factors are combined to calculate the true value of KEY’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $14.4 + $4.54 = $18.93
This results in an intrinsic value of $18.93. Given KEY’s current share price of US$18.74, KEY is trading in-line with its true value. This means there’s no real upside in buying KEY at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell KEY. There are other important factors to keep in mind when assessing whether KEY is the right investment in your portfolio.
Next Steps:
For banks, there are three key aspects you should look at:
Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
Future earnings: What does the market think of KEY going forward? Our analyst growth expectation chart helps visualize KEY’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether KEY is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on KEY here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
