What is a telltale sign that a stock should be in an investor's portfolio? I would argue that when a stock consistently beats analysts' revenue and earnings forecasts, that's often an indication that the stock's business model is a winner.
One example of this is the regional bank KeyCorp (KEY 1.74%), which reported a stellar fourth quarter late last month. What led to the expectation-defying quarter? And why is the stock a good buy for this year? Let's dig in to tackle these questions.
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Ending 2021 in style
When it reported financial results for the fourth quarter ending Dec. 31, KeyCorp exceeded analysts' estimates for both revenue and diluted earnings per share (EPS).
KeyCorp generated $1.95 billion in revenue during the fourth quarter, which was a record for the fourth quarter. This represented 5.5% growth over the year-ago period. KeyCorp's revenue easily topped the analyst consensus of $1.8 billion in the fourth quarter.
The company produced $1.04 billion in net interest income during the fourth quarter, which was a 0.5% year-over-year decline. KeyCorp's net interest margin, which is the difference between interest income received from customers and its cost of borrowing money, fell 26 basis points year over year to 2.44%. However, this was mostly canceled out by a favorable earning asset mix.
KeyCorp's noninterest income was $909 million, which worked out to a 13.3% growth rate over the year-ago period. The robust growth in the company's noninterest income was driven mostly by double-digit increases in investment banking and debt placement fees, as well as commercial mortgage servicing fees.
KeyCorp recorded $0.64 in diluted EPS, which was 14.3% higher over the prior year. This also managed to handily beat the analyst consensus of $0.56.
Revenue rising faster than expenses was what resulted in the earnings beat. KeyCorp's 3.7% rise in total noninterest expenses to $1.17 billion during the fourth quarter was the result of both higher personnel and non-personnel expenses. Personnel expenses were $674 million in the quarter -- 2% higher over the year-ago period, which was due to higher incentive and stock-based compensation. Higher computer processing fees and business services and professional fees led to a 6.2% year-over-year increase in non-personnel expenses to $496 million during the quarter.
Rate hikes will be a boost
The Federal Reserve is expected to begin raising interest rates in March to combat inflation that's near a 40-year high. KeyCorp CFO Don Kimble indicated in remarks during the company's recent earnings call that every 25-basis-point rate hike would lead to an additional $50 million to $60 million in net interest income for a full year.
Since several rate hikes are expected to occur this year, it's not unreasonable to expect at least a $150 million increase in KeyCorp's net interest income. Against the $4.1 billion in net interest income in 2021, this will be a meaningful tailwind for KeyCorp.
A sturdy balance sheet
KeyCorp is operationally healthy. But is the company's balance sheet financially sound? Let's take a look at KeyCorp's Common Equity Tier 1 (CET1) ratio to answer this question.
KeyCorp's CET1 ratio slightly declined from 9.7% in Q4 2020 to 9.4% in Q4 2021. Despite the minimal decline in its CET1 ratio, the company's balance sheet is still quite strong. That's because a 9.4% CET1 ratio is much higher than the 7% statutory requirement (4.5% on top of an additional 2.5% of a bank's risk-weighted assets).
There's still value to be had with KeyCorp
KeyCorp's share price has soared 43% over the last year. But because the stock was so undervalued relative to its industry, this recent performance doesn't appear to have made the stock prohibitively expensive.
On the contrary, KeyCorp's forward price-to-earnings (P/E) ratio of 11 is slightly below the regional bank industry average of 11.4. This is despite the fact that KeyCorp's growth potential is higher than the industry average. Analysts anticipate that KeyCorp's EPS will grow at a 14% rate annually over the next five years, which is well above the industry average of 7%.
While investors wait for KeyCorp to be rewarded with a higher valuation multiple, they can collect a safe, market-beating 3% dividend yield. That's why KeyCorp still appears to be a solid pick for income investors.
