KeyCorp (KEY) Stock Could Be 47% Undervalued Despite Its 117% Run

KeyCorp has delivered a 117.0% share price gain over the past three years, which puts fresh focus on what investors are really paying for. The question now is whether that price tag lines up with the returns the bank earns on the capital it puts to work.

• The 117.0% move over three years means anyone looking at KeyCorp today is effectively pricing in a very different future for the returns it can generate on its balance sheet than they were a few years ago.
• For a regional bank that depends heavily on how efficiently it turns deposits and loans into profit, the sustainability of those returns on equity and invested capital can heavily influence what counts as a reasonable entry price.
• What if you looked at KeyCorp through its earnings instead? See what KeyCorp's 11.7x P/E says about the price.

The issue now is whether the recent share price level is supported by the returns KeyCorp is earning on its capital base.

You can pressure test KeyCorp's capital return profile against a wider set of banks and financials by scanning 33 high quality undervalued stocks.

Does KeyCorp Look Undervalued on Excess Returns?

The Excess Returns model looks at how efficiently KeyCorp turns its equity base into profits above the return that shareholders require. Instead of centering on dividends or short term earnings surprises, it focuses on what those excess profits might be worth over time compared with the current $20.72 share price.

For KeyCorp, the inputs point to a bank expected to generate returns on equity that sit above its implied cost of equity. Book Value is $16.14 per share and the Stable Book Value estimate is $16.96 per share. Stable EPS is $2.04 per share based on Return on Equity estimates from 9 analysts. The model treats the Cost of Equity as $1.24 per share and the Excess Return as $0.79 per share, which is where most of the valuation work happens.

Average Return on Equity of 12.02% suggests the business is modeled to earn more on its equity than investors are assumed to require. This supports a higher intrinsic worth than a bank earning only its cost of capital. Because the Excess Returns projections put KeyCorp's estimated intrinsic value substantially above the current share price, the model implies the market is not fully crediting those forecast excess profits at $20.72 per share. Find out what KeyCorp could be worth using our Excess Returns estimate.

The KeyCorp Narrative: What Would Justify Today's Price?

Simply Wall St Narratives take the valuation puzzle around KeyCorp and turn it into clear, competing stories about what would need to happen to growth, margins and earnings for the stock to be worth markedly more or less than today. Each narrative links its number to a specific view on where KeyCorp's expansion, profitability and risk profile could head next. This gives you a reference point to revisit as new information comes through.

One of the top community narratives on KeyCorp: 20% undervalued

"Strong growth in the national third-party commercial loan servicing business, providing a counter-cyclical revenue stream and insights into the commercial real estate market..."

Discover why this Narrative puts KeyCorp at 20% undervalued.

For KeyCorp, the price tag is only one piece of the decision

Before you put KeyCorp in any portfolio bucket, it is worth asking who is steering the bank, what they are rewarded for, and how that shapes the choices they make with your capital. See who runs KeyCorp and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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