KeyCorp (NYSE:KEY) and Fifth Third Bancorp (NASDAQ:FITB) are the two most active stocks in the Regional – Midwest Banks industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KEY to grow earnings at a 8.31% annual rate over the next 5 years. Comparatively, FITB is expected to grow at a 7.83% annual rate. All else equal, KEY’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. KeyCorp (KEY) has an EBITDA margin of 40.68%, compared to an EBITDA margin of 52.04% for Fifth Third Bancorp (FITB). This suggests that FITB underlying business is more profitable. KEY’s ROI is 9.50% while FITB has a ROI of 9.50%. The interpretation is that KEY’s business generates a higher return on investment than FITB’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. KEY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, FITB’s free cash flow per share was +0.16. On a percent-of-sales basis, KEY’s free cash flow was 3.02% while FITB converted 1.71% of its revenues into cash flow. This means that, for a given level of sales, KEY is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. KEY’s debt-to-equity ratio is 0.93 versus a D/E of 0.89 for FITB. KEY is therefore the more solvent of the two companies, and has lower financial risk.
KEY trades at a forward P/E of 12.11, a P/B of 1.42, and a P/S of 4.91, compared to a forward P/E of 13.86, a P/B of 1.39, and a P/S of 4.87 for FITB. KEY is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. KEY is currently priced at a -9.06% to its one-year price target of $20.64. Comparatively, FITB is 0.75% relative to its price target of $28.01. This suggests that KEY is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for KEY and 2.90 for FITB, which implies that analysts are more bullish on the outlook for FITB.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. KEY has a beta of 1.11 and FITB’s beta is 1.37. KEY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. KEY has a short ratio of 1.31 compared to a short interest of 2.29 for FITB. This implies that the market is currently less bearish on the outlook for KEY.
KeyCorp (NYSE:KEY) beats Fifth Third Bancorp (NASDAQ:FITB) on a total of 8 of the 13 factors compared between the two stocks. KEY is growing fastly, generates a higher return on investment and has a higher cash conversion rate. KEY is more undervalued relative to its price target. Finally, KEY has better sentiment signals based on short interest.