PNC Financial Will Break $73, Outperforming KeyCorp

| About: PNC Financial (PNC)

With PNC Financial Services (NYSE:PNC) trading at just 78% of its 5-year average PE multiple, analysts are recommending that investors open a long position before we hit a nearing inflection point. As the global economy improves, financials are well-positioned to gain having improved liquidity and reduced risk. PNC is currently rated a "buy" versus a "hold" for competitor KeyCorp (NYSE:KEY) - a sentiment that I more or less share.

From a multiples perspective, both firms are significantly cheap. PNC trades at a respective 9.4x and 8.8x past and forward earnings, while KeyCorp trades at a respective 8.7x and 9.9x past and forward earnings. With a stellar free cash flow yield of 14.1% and an attractive dividend of 2.4%, PNC offers the greatest risk/reward. For more comparison, US Bancorp (NYSE:USB) trades at 11.8x past earnings and offers a weaker dividend and free cash flow yield.

At the fourth quarter earnings call, PNC's management noted favorable progress despite significant headwinds:

Looking back 12 months, when 2011 began, it was predicted that banks would be facing an operating environment dominated by low interest rates, slow economic growth and new and challenging regulations. Well, as it turned out, 2000, in fact -- 2011 was, in fact, all that it was advertised to be and then some. In spite of that, overall, PNC had a good year of solid accomplishments, focusing on what we do best: serving customers, cross-selling products and services and managing risk and expenses.

Let me share some highlights. For the year, we earned $3.1 billion in net income or $5.64 per diluted common share. With our recognized brand, innovative product offerings and strong cross-selling ability, we saw remarkable growth in the number of customers we served. In fact, our retail checking relationships and corporate business clients are at record levels.

All of our markets, all of our markets, we're ahead of their sales goals in 2011.

While fourth quarter earnings of $1.48 per share were disappointing as a result of greater expenses, guidance was relieving - and investors are focusing on the long-term. Nonperforming loans fell 4% sequentially as credit trends were strong. Going forward, a lack of exposure to Europe and less NIM pressure than peers will generate safer upside.

Consensus estimates for PNC's EPS forecast are that it will grow by 3.1% to $6.23 in 2012 and then by 8.7% and 7.8% in the following two years. Assuming a multiple of 11x and a conservative 2013 EPS of $6.68, the rough intrinsic value of the stock is $73.48, implying 23.1% upside.

KeyCorp has seen meaningful improvement in credit quality as early delinquencies are reigned in. The Tier 1 Common Ratio now exceeds 10%, and nonperforming loans have declined as the coverage ratio remains strong. KeyCorp has enough liquidity for takeover activity and loan growth financing. With that said, business outside of the Community Bank business - the "Other" segment - has dragged back value creation, given poor momentum. Fears over capital allocation, moreover, are very real, given previous cuts that had to be made to address loan losses.

Consensus estimates for KeyCorp's EPS forecast that it will decline by 12.6% to $0.76 in FY2011, and then grow by 5.3% and 26.3% in the following two years. Assuming a multiple of 11x and a conservative FY2012 of $0.77, the rough intrinsic value of the stock is $8.47, implying just 6.7% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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