Stock Analysis: Citigroup (C)

Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash

Pretty sure everyone knows this, but Citigroup is an international bank.  In regards to how it reports, it's broken down into 3 major sectors: Consumer banking which generally are things like personal checking, savings and loans; Securities and Banking, which covers the investment and portfolio management section of the company; and finally Transaction Services, which is how Citi advises businesses to help them grow and expand (think mergers and acquisitions, expansions into new countries, and other challenges similar to this that can be faced).  Every bank has a consumer section.  It's the cash cow, if you will of the industry.  You put your money into checking and savings accounts and they use the money to provide loans or invest in short-term bonds and treasuries to make a higher interest rate than they give you.  Bank to bank, there's no edge on this outside of who has more deposits.  Each of Citi's main competitors have Investment and advisement arms as well, however, these sections are where the competitive edges come.  The investing portion is a difficult way to guage a stock because each company can perform differently from quarter to quarter, however, when someone has a good quarter, it really helps the revenue numbers for that given quarter.  I feel the real differentiation here is the advisement arm.  Though, too, from quarter to quarter companies may get an edge on their Mergers and Acquisitions, there's so much more work that goes on here and exposure to the rest of the world in a growing world economy could be a huge advantage and this is one reason why I had selected Citi (other than reasons called out in previous posts).

Past Year:
Anyone owning Citigroup in for the last year doesn't have a lot to complain about.  It grew 31.72% on the year which edged out the performance of the S&P 500.  However, it did underperform the financial sector, which pulled in 35.11% based on the XLF ETF fund.  Citi has been a much loathed stock and for much of the time for good reason.  When it came to the financial crisis, Citi was arguably the worst bank not to go under - and yes, it was saved by the US tax payer, so this sure doesn't make it favorable in the eyes of many regardless of whether the US profited from it or not.  Even today the government has not really allowed them to increase their dividend and give back to shareholders, much to my own malign.  This was one of the reasons I thought this stock would pop and in the end, it's been one of the reasons it's been held back.  The overall performance of the stock in the past year was pretty average in all honesty.  They just reported a heavily disappointing fourth quarter, however, you also have to take into consideration that the two previous quarters this bank was the darling in relative performance compared to Bank Of America and JP Morgan - shining when both disappointed.  This quarter, it seems to be the other way around.  There's no doubt there are some concerns with what I heard in this quarter's results.  There is a goal to reduce expenses by 2015 and although there certainly are signs that they've made great strides, the rate at which they're reaching their goals are decelerating.  With even more expenses expected going forward much because of additional regulations, reducing expenses and increasing margins may be more difficult unless they take action now.  As I stated earlier, the more deposits you have, the more your cash cow will produce milk to allow you to invest in the rest of the business.  Deposits have me a little concerned, primarily in the international banking sectors as the international community lags the US in its economic health, broadly speaking.  Mortgages are down 20% from a year ago due to the reduced number of refinances now that interest rates started to rise.  This is happening to every bank that's reported though.  This quarter, where it seemed Citi really failed was in their investment arm.  Interest rates rose, many people started getting out and it seems Citigroup was caught holding the bag.  That's the best explanation I have, even if it might not be a accurate depiction of what's happened.  It seems clear, though that one of the key impacts to this quarter's results was the fixed income markets.  Perhaps Citigroup just got too cautious too early as we saw a down October, but huge rallies in late November through the end of the year in the stock markets.  I actually feel this is something that can be overcome, and possibly with interest rates on a decline (at least temporarily), they're already getting positioned to make up for past mistakes.  Transaction services was (the advisement arm) was also a bit disappointing.  On a year strong with IPOs in the stock market and a number of mergers and acquisitions, I guess I feel Citi would've performed better.  Additionally worrisome is the fact that this flat year over year results were on increased margins - meaning the top line declined.

2014 Prognostication:
There's no doubt that the fourth quarter results seem a little hard to swallow.  But what matters is where a stock is heading, not where it's going.  Short-term, as banks complete their earnings calls, I'm willing to bet C pulls back further after the 4.35% shave it took today.  How much further?  Well from a technical perspective, there's the 50 day moving average at $51.91.  That likely gets tested tomorrow.  If we break through, the 200 day moving average is at $50.  I honestly see this as a likely holding spot.  The truth is that this stock is still priced less than tangible book value (which is a little over $55) and though this wasn't a great quarter, the year wasn't all bad and there is potential in front of this stock too.  I feel the biggest headwinds for this stock is going to be the pace in which the rest of the world's economies recover.  What made Citi a better performing bank in the first half of last year and last half of 2012 was it's international exposure.  Right now this seems to be a bit of a liability as US growth had been taking over.  So far in January, we see signs of some kind of pause - stocks generally flat, no inflation, jobs number disappointing and retail earnings all indicating that not everything is doing quite as well as people thought yet.  This pause might be just what Citi needs to get everything rolling again.  The fact that this bank still doesn't trade at tangible book value continues to be an advantage, but truth be told, after this quarter's earnings, there's a good chance that Citi will lag the rest of the banking sector.  This stock is worth keeping your eyes on, though. They have one of the highest BASEL III ratios of all the institutional banks and the next round of stress tests are coming. Citi is focused on shareholder return and that belief that they intend to move up the dividend significantly is still there.  Such a result is likely to boost stock prices.  Conditions as they stand today, though, leaves me with a $58 price tag on this stock by the end of the year.  That's a 10% rise in price, which I think is quite respectable.  Watching to see what  happens with the stress tests and how they respond with first quarter results will be the key catalysts that I see at this point.

My Stock Ownership Plans:
This stock has performed adequately for me and I continue to hold my position, which is currently about 10.5% of my portfolio of discussion.  I see limited down side to this stock after today's shave and may consider purchasing more, if I have room in my portfolio, around 50 - with a strong position to wanting it to go below 50 before I'd pull the trigger.  I think it would take a large negative news story to take this stock below 50, but you have to remain flexible.  Based on all of this, I rank this stock a 2.  As the economies turn around, financials are going to benefit and so will their stock holders.  It can be said right now that I might be holding onto the wrong financial stock, and that may be true.  However, I see more potential for growth with Citigroup as we look out to 2015 and 2016 and providing they can closely maintain pace with the S&P 500, I'm willing to hold for that future potential.