Citigroup - Stock analysis

Last night I reviewed the 2012 year and said I would start doing a deeper analysis of each of my holdings as a lesson learned. Today I've started my follow through of that work by analyzing my Citigroup position. Now it's time to share what I'e learned.

First thing I want to discuss is my thesis - the reasons I think the banking sector and this stock will do well (remember, if a stock is going to do well, the sector typically has to as well). I pick the banking sector for 2 reasons. The first is that they're starting to come back into favor with investors. This will become even more true as banks are allowed to release and increase the amounts if capital they can give to shareholders. When this happens, demand for a stock increases and so does the share prices. As dividends increase you'll see more retirement accounts picking up the stocks as well. The second reason is the turn around factor. The banks were buried with the US financial crisis. The companies performed poorly, and the stocks performed even worse. I knew a time was coming where banks would have to catch up with the rest of the market's performance. Unfortunately, I started my position too soon back in the day. Today, everything but the absolute hate is still true for banks and Citi. Banks are slowly becoming more favorable as people forget about all the pain they caused, as stock prices indicate, and this lack of hate can be considered one reason why banks have been on a rise in the last half of 2012.

I've talked about the thesis and why I like the sector, now let's get into why I like Citi itself.  Of all the bank stocks since 2010 - the point in time when banks started recording gains in earnings - JP Morgan, Wells Fargo, and US Bank were the best of the best.  Citigroup and Bank of America were the worst.  And their stock prices reflected it.  In 2012, Bank of America made up for it's lagging by surging over 100% for the year.  Citi did well - rising over 60% which was higher than both Wells and JP Morgan, but overall, it's still behind in the catch-up game.  It's not common for bank stocks to trade below their tangible book value, however Citi is currently 0.8x it's tangible book value as of Sept 30, 2012.  After it's strong beat of Wall Street estimates for the 3rd quarter, I think Citi is finally to a point where it can beat its numbers over the next few quarters and return to above book values (1.2 - 1.5 is more in line with "normal" for banks).  This is one reason to look to Citi to continue its surge in 2013 and the technicals seem to share in that sentiment.  On Dec 4, Citi's stock broke out of what chartists call the "cup and handle" which had been getting set for the course of 9 months.  I'm not much of a chartist, myself, so I've picked some of this info from various research I've seen.  This week, it just burst through the top line of it's bollinger bands using a 50 day average too.  These are true signs of a breakout, so these, too, are good signs.  Citigroup also has two catalysts to watch for.  The first is that they are actually an international bank.  As of 3rd quarter 2012, Citigroup' revenues were almost 49% of the total revenues generated.  This was one reason Citigroup was held back.  With all of the events going on in Europe, no one felt safe that Citi would not be hurt (despite EMEA revenues being a very small portion of their revenues - $379 Million out of $4.863B in International revenues in Q3).  However, it would seem that as of now, the US is slower than the rest of the world in terms of recovery and still has a debt ceiling overhang coming in the future whereas China, India, Europe, and Latin America appear to be taking off.  This could turn to be a huge shot in the arm for Citigroup compared to the other mostly American banks.  There is one final potential catalyst.  Citi has yet to be allowed to pay out capital to its shareholders.  Last year Citi failed the federal stress tests and this, too, hurt the stock bad as everyone was expecting to see a legitimate dividend.  It's rumored this is one reason why they let the former CEO go.  Now the company has had an entire year to get things fixed and work with the government to pass the stress test and be allowed to start returning capital. If this goes through, people may start flocking to the stock for retirement accounts (they like stocks with dividends) which would be all the more of a boost for those buying in for growth and an improvement in earnings.

All good stocks have risks, however, and we need to be aware of what those are.  The first risk I want to stress is the very same catalyst I finished with for potential pops in the stock - the stress tests.  If the results of the stress test are not positive and a meaningful dividend and/or stock buyback is allowed, this could be seen as another huge failure and the stock could be hammered from it. If this happens, be prepared to sell some of your position.  Unless these results are combined with a nice sized beat in earnings and a raise in any kind of guidance, the stock could get hit.  Another risk is the fact that the stock price is climbing exceptionally fast.  It can be said that BAC did the same thing last year, so we should be fine, but it's always something to look out for.  Another thing that makes the quick rise in price a risk is the fact that in the Analyst's world, Citi is becoming heavily favored.  Out of 33 analysts, 25 are buy or strong buy, and 5 are hold.  That's a lot of generally positive views for something that was supposedly so hated.  It's certainly something to watch out for.  The final thing to watch out for would be the fall in growth from the international regions.  If these start to falter, something that I perceive as a strength could become a liability when you compare to the other institutional banks.

Now let's talk strategy.  Currently, I expect Citi to report 4th quarter earnings of 1.06/share again.  The consensus is 0.99/share.  Either way, we're looking at the current value to be about 10x earnings and still at 0.8x book value.  My target price at this time is 1x book value which is about $51.  If we get to that price point, I need to do another analysis as we'll still be under 12x earnings and 14x earnings can be considered to be a more normal area - this leaves mulit-year price appreciation potentials to be almost double where we are today without being over valued as long as my thesis stays intact..  My prediction is that they'll post earnings of 4.60 in 2013.  If the thesis breaks down, I need to be prepared to sell some of my position and lock in the gains I've acquired.  Clearly the biggest risk I have in front of me is the results of the stress tests.  If things start to turn south, I'll have to assess if my thesis is broken or if a new risk has been introduced which should make me cash in some gains and determine if it's a temporary measure or something to make me leave the stock in whole. I have no needs to add to my position at this point as it's currently sitting at one of my largest stakes.  So taking that into consideration, I may at some point lock in some gains to be transferred to other areas, if needed.  It will depend on how my portfolio performs on a whole.

So there's my assessment of Citi.  Those that have large positions to work with might want to lock in a portion of the gains that have been accumulating as we go into the January 17 phone call - just in case we get bad news regarding dividends, buybacks, and future growth prospects.  Never hurts to take a little gain at least and if we do fall from a poor conference call, you'll have capital to repurchase your stake when things settle down again.  I hope people appreciate this analysis.  Maybe you agree, maybe you don't, maybe you think I can/should do a much better job than this. Go ahead and provide constructive feedback.  It's the only way we all learn.