Stock Analysis: Citigroup (C)

Notes:
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.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Today Citigroup announced their 2014 third quarter results.  Earnings came in at $1.15, which was above the $1.14 estimates and revenues came in at $19.6B compared to the $19B estimates.  Additionally, they have annoucned that they are exiting consumer operations in 11 markets.  Again, Citi Holdings - the pieces that's being looked to be sold off - provided a nice lift.  All of this combined turns into a good overall report.  What makes this company difficult to gauge is the fact that you never get forward guidance quarterly.  I have trouble trying to predict what the future will look like.  However, I'm going to give it a try.

I'm going to make an attempt to break this down, but a lot of this is just guesses - I'll put that out there right away.  I'll try to call out real numbers I've found where appropriate, but everything else will be what I call a "reasonable assumption."  

First, macro considerations.  In the short-term, a strong dollar, Russia-Ukraine Issues, Net Interest Margins falling, and some strife in the global economy are likely to put some pressure on the stock.  However, I don't really see that pressure being any stronger than what we've experienced in the last 12 months.  Additionally, I don't anticipate the global economy to be a year-long drag either.  This will be much more like 2012 when we see a turn around after a number of months - perhaps as soon as first quarter 2015.  There are no legal concerns remaining to impact the balance sheet and the company is starting to show it's potentially the best bank in the business, for now, when compared to the numbers just reported from JP Morgan and Wells Fargo today.  As such, I maintain my belief that the down side risk remains around $47.  

Looking more at the company's internals, I actually see more upside when going into 2015.  First, we have a new CCAR as we enter the new year.  Discussions around it actually start in November, but we'll hear the plan and approval early second quarter 2015.  After an embarrassing result this year, I don't expect Citigroup to fall on its face a second time.  They've spent the entire year working with the Fed to get on the same page.  This should mean a share repurchase program as well as a dividend boost.  I give this maybe $2 of upside at this point.  While the company continues to improve on expenses, their revenues are also growing on the year.  The current decrease in NIM will likely slow that revenue growth some, but it seems Citi has done a good job mitigating that risk as well.  Additionally, I don't think it's reasonable to predict interest rates will stay as low as they are now, or are possibly heading, throughout 2015.  I think it's wiser to predict a similar NIM for 2015 where by the end of the year 10-year Treasuries are around 3%.  This leaves me in a position that the banks will likely have another year of churn in them.  I'm going to anticipate earnings growth of 5% - 3% based upon the rate of growth this last year, plus an additional 2% for international growth for my prediction of the improvement of the world economy.  

At this point, Citi has already accumulated $3.69 in earning on the year.  I'm predicting another $1.15 for the fourth quarter.  That puts 2014 earnings at $4.84 and given my 5% growth prediction, 2015 earnings would be at $5.08.  This means that as of today's $51.47 stock price, Citi is trading at 10.6 times earnings.  If I play this by the book, we'd be fairly valued on a P/E basis for 2014 and the same multiple would equate to a Target price of $53.84.  However, the other thing to keep in mind here is the Tangible Book Value (TBV).  This is really what banks trade on and Citi is currently the most on sale compared to TBV.  This quarter, they announced a TBV of $57.73.  Banks usually trade at a multiple of book value and most banks right now are trading above 1 times book value.  Today Citi is selling below book value.  Let's play conservatively and say it will and should trade at book value.  This puts a 2014 target price of $57.  TBV has been growing a conservative average of 1.25% per quarter, or 5.8% year over year based on prices at the third quarter 2013 and 2014.  Let's round down a little and say 5.5% growth of TBV for 2015.  This helps account for a low NIM which will slow the book value's growth.  At that rate, book value would be estimated to be at $58.35 at the end of 2014 and at $61.55 at the end of 2015.

Given all the factors I've predicted above.  I give Citi a 2 ranking.  I will keep my 2014 target at $55 due to the short term concerns.  However, my 2015 target is going to get set to $61 or 1 time TBV.  I think this is a relatively conservative estimate, if all of my predictions are correct.  This provides a 8.7% downside risk and a 18% upside risk over the course of the next 16 months.  Potential risks to watch for include a stagnation of growth, another CCAR failure, and expenses starting to rise.  I believe these are fair odds to be playing with and why I suggest buying the stock if it pulls back under $50.  At this point, my portfolio cannot take more stock on.  If I infuse my portfolio with more funds, I may consider increasing my position to maintain a similar size for this sector.