KeyCorp Is Well-Positioned For 2019, And The Stock Has A Potential Kicker

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About: KeyCorp (KEY)
by: WG Investment Research
Summary

KeyCorp's stock is outperforming the broader market so far in 2019.

KeyCorp recently reported strong Q4 2018 operating results (top and bottom line beats) and the regional bank has a new potential catalyst that could help propel the stock higher in 2019.

I am long KeyCorp, and I plan to stay long the stock.

KeyCorp's (KEY) stock has performed extremely well so far in 2019, as KEY shares are up almost 17% on a YTD basis.

Chart Data by YCharts

However, let's not forget that KEY shares are still significantly underperforming the broader market over the last year (-15.5% compared to the S&P 500's 5% over the same period of time). KeyCorp appears to be a great long-term investment at today's price, even after the recent run-up, because I believe that the bank's management team has it well-positioned for 2019 and beyond.

The Latest, Good From Top To Bottom

On January 17, 2019, KeyCorp reported Q4 2018 results that beat the top and bottom line estimates. The bank reported adjusted Q4 2018 EPS of $0.48 (beat by $0.01) on revenue of $1.65B (beat by $10M), which also compares favorably to the year-ago quarter.

Source: Q4 and Full-year 2018 Earnings Press Release

The highlights:

  • Record full-year revenue of $6.4B (up 2% YoY)
  • All-time highs in revenue for several of its fee-based businesses (most notable examples being investment banking and debt placement fees)
  • Net interest income up 3% YoY, which was fueled by balance sheet growth and slightly higher rates
  • Non-interest expense down 3% YoY

And 2018 was the 6th consecutive year of positive operating leverage, which is obviously no small feat. This all sounds good, right? For the negatives, KeyCorp reported higher net-loan charge-offs, higher allowance for loans & leases, slightly lower non-interest margin, and its management team provided what some pundits view as lackluster guidance.

Looking ahead, I believe that KeyCorp is well-positioned for 2019 and beyond. The bank will continue to benefit from rising rates (that is, of course, if rates continue to rise) and management finally appears to have a grasp on KeyCorp's expense base. Remember, it was not too long ago that this bank acquired First Niagara and started the process of streamlining operations and cutting out unnecessary expenses.

For 2019, management is guiding for the bank to have a strong fiscal year.

Source: Q4 and Full-year 2018 Earnings Presentation

Additionally, I believe that KeyCorp's capital return story is enough of a reason to hold onto KEY shares, as I recently described, but there is another potential catalyst for the stock that may materialize in the months/quarters ahead.

The Catalyst?

Stocks of many regional banks shot up after the merger deal between BB&T (BBT) and SunTrust (NYSE:STI) was announced, as many analysts are already calling the deal to be a "catalyst for consolidation." The deal is the largest U.S. bank merger since the financial crisis and, as many pundits are predicting, may provide a path forward for other regional banks that are trying to grow through M&A activity.

It is all speculation right now but, in my opinion, KeyCorp would be an ideal takeover candidate if the industry went through a period of time of major consolidation. As such, a potential takeover could be the kicker for KEY shares.

Valuation

KeyCorp's stock is trading at attractive valuations when compared to its peer group.

Chart Data by YCharts

Additionally, KEY shares are attractively valued based on the bank's own historical metrics.

Chart Data by YCharts

Given KeyCorp's above-average dividend (~4%) and attractive valuation, I believe that KEY shares are a long-term buy at today's price.

Risks

The banking industry has promising prospects in 2018, but a significant downturn in the economy would negatively impact KeyCorp's business. I do not believe that a recession is likely over the next 12-18 months, but things could change quickly.

Integration risk is another important factor that investors should continuously consider for KeyCorp. Management has talked up the First Niagara acquisition so far, and I tend to agree with its assessment of the deal up until this point in time, but there is no guarantee that the acquired assets will be a strategic fit for KeyCorp through 2019 and beyond.

Bottom Line

There was a lot to like about the bank's Q4 and full year 2018 operating results but, in my opinion, the major takeaway was that KeyCorp appears to be well-positioned for 2019 and beyond. Moreover, I believe that the bank is operating in a backdrop that is not as bad as the picture that some pundits are currently painting - i.e., entering into a business-friendly operating environment that will be fueled by rising interest rates, a rollback of burdensome regulations, and an improving economy (barring any significant headwinds created by the political "mess").

In my mind, KeyCorp is a capital return story with a kicker (potential M&A), especially after considering the fact that the bank increased its dividend by 62% and bought back over $1.1B of its stock in fiscal 2018, and I believe that investors should expect more of the same in 2019. Therefore, pullbacks should be considered long-term buying opportunities, especially if they are caused by broader market selloffs.

Author's Note: I hold a KeyCorp position in the R.I.P. portfolio and I have no plans to sell any shares in the near future.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long KEY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.