[Briefing.com] Trader's Edge: KeyCorp (KEY) 02-Feb-01 00:03 ET
[BRIEFING.COM - Patrick J. O'Hare] When interest rates come down, it's good for the market, it's good for the economy, and its good for the financial stocks. Banks, in particular, benefit from lower rates as they help boost loan activity and profit margins. The key, though, is identifying which bank stocks might do better than others. Enter KeyCorp (KEY 26.82), a regional bank headquartered in Cleveland, which has a new CEO, a new marketing campaign, and a new focus on bolstering profitability...
Trading Points
KEY is in the second and final phase of a 3-yr competitive initiative, launched in 4Q99, that was designed to cut costs, to enhance revenues, and to focus on the most profitable growth businesses... In the final phase, KEY's intention is to consolidate 22 business lines into 12 and to eliminate roughly 2300 positions which would bring total workforce reductions above 4,000 for both phases... KEY is anticipating this effort to lead to $360 mln in annual cost savings by the end of 2002.
KEY is coming off a record fourth quarter in which it posted core net income of $272 mln, or $0.63 per diluted share, three cents ahead of Zacks' estimates, and an 11% improvement from the yr-ago period... The momentum of its competitive initiative was evident in KEY's return on average equity and return on average assets, which stood at 16.53% and 1.27% in Q4 versus 14.97% and 1.16% in Q3.
KEY is seeking to raise its profile on a national and regional level, having announced last week the launch of a new multimillion-dollar, multimedia advertising campaign with "Achieve Anything" as its brand line.
KEY's former CEO, Robert W. Gillespie, retired as CEO, effective yesterday... Henry L. Meyer III, former COO and architect of the bank's restructuring, has succeeded Gillespie.
Meyer has said that KEY should not be viewed as a takeover target, and if its stock price improves, it could be making acquisitions in 2H01... Nevertheless, it would be remiss of us not to mention that KEY is frequently mentioned as a takeover target given its depressed stock price, Midwest presence, and sound capital position... Fifth Third Bank (FITB 58 7/16), which recently acquired Old Kent (OK 42.96), is sometimes rumored to be a potential acquirer; and we would also note that bank acquisitions, lately, have typically been made at a price of 2.5x-3.0x an acquiree's book value.... KEY currently trades at 1.76x book value.
KEY sports an attractive P/E ratio, too, of 10.8x est. FY01 earnings-- roughly a 30% discount to the industry P/E multiple.
KEY recognizes the attractiveness of its own stock as it bought back 5 mln of its common shares in Q4 under an authorization that allows for the repurchase of up to 25 mln shares (18 mln shares remain for repurchase as of 12-31-00)... KEY's focus on driving shareholder value was also reflected in a 5.4% increase in its quarterly dividend to $0.295-- its 36th consecutive year with a dividend increase and representing an attractive dividend yield of 4.40%.
Most analysts, though, don't find KEY too attractive as 16 of 19 have a HOLD recommendation, leaving plenty of room for upgrades if KEY can deliver better than expected results.
KEY gained as much as 33% from its Nov. 20 intra-day low of 20.0625 to its January 4 high of 29.25... That interim peak came the day after the Fed's surprise 50bp rate cut... Since then, KEY has been drifting lower and is hovering just above its 50-day moving average at 26.563, which it briefly dipped below in yesterday's action... Penetration on a closing basis would invite a move to the 25 area, and a breach of that level paves the way for a re-test of its 200-day moving average at 22.321.
Briefing.com would be inclined to use subsequent pullbacks as a buying opportunity as a better interest rate environment coupled with a possible tax cut and the company's attractive valuations, its appeal as a takeover candidate, its emphasis on bolstering profitability, and the high degree of negativity surrounding the stock make KEY an attractive investment option.
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