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

On Friday, Citigroup announced fourth quarter and fiscal year 2015 earnings results.  Earnings beat on both top and bottom lines,  with earning of $1.06 on revenues of $18.45B.  Estimates were $1.05 and $17.87 respectively.  Guidance was basically similar results in 2016 as we saw in 2015 while the company completes it's Costco credit card agreement and aligning itself to where it believes the strengths in the industry.  Tangible book value at the end of the quarter was $60.60, a 6.6% increase over its price at the end of 2015.  This was the fourth consecutive quarter the company beat expectations and the sixth consecutive quarter that Citi Holdings managed to generate a profit.  Despite the beat and relatively acceptable guidance, the stock was crushed, down 6.41% in trading Friday - a significant under performance compared to its peers for the second day in a row.  I think some of the action on Friday has to do with the fourth quarter earnings call and a man by the name of Mike Mayo.  Mayo is a highly regarded analyst in the institutional banking area.  He's one reason that Vikrim Pandit was ousted and Corbat was put in as Citi's CEO.  Despite his bullish view of banks, he asked some rather hard hitting questions of the management team, particularly regarding how much loan loss reserves they were allocating for the energy industry, their view of the amount of loan exposure risk in that industry, as well as their outlook in China.  Citi did not share answers to those questions - something Mayo noted as an exception to their peers.  I believe this created more worry and uncertainty and gave people an additional reason to sell this stock.  Should they come out in the fixed-income call or another announcement and declare answers to these questions, I believe the stock would pop - providing the answers weren't shockingly negative.

As I noted in my year end review, there is some history with financials performing rather poorly the first year after a trend from rate lowering to rate hiking.  It appears to be happening again, though I don't exactly relate it directly to that.  All financials are getting hammered right now.  For that to change, I'm thinking a few things need to happen.  First and foremost, oil prices need to stabilize.  I think the largest impact to the financials overall is the uncertainty of how energy company defaults on loans made by the banks will impact both the industry and the economy.  Because it's still so fresh on people's minds, I think people are relating this to the 2008 financial crisis, despite the banks being well capitalized to address this particular issue.  There seems to be a lot of fear that the financials will crumble all over again.  That said, these oil prices are down hard, could go down further yet, and are likely to stay low for some time.  Though these prices are lower than I would've expected a year ago, the action is in line with my thoughts.  It's too easy to bring on supply and right now there is too much supply.  This will force prices to stay down for years to come.  The second thing that can help would be stabilization of the Chinese economy.  This impacts the international banks, like Citi, more so than regional ones.  And Citi has the largest exposure to China right now too.  I believe that if these two things happen, the overall stock market can begin to stabilize, the 10year will start reflecting rate changes (it's currently back to levels seen before December's rate hike) and banks can become favorable again.  That said, I think Citi is a great stock to have, given it's price compared to it's tangible book value (TBV).  It's just looking like a poor time to own it.

Now, for my outlook.  For the short term, I see this stock performing weaker than the competition despite beating estimates for the last 4 quarters.  Should the things I've described above come to fruition, then you might see things change, though I think it will be clarity around the company's own assets and risks that will be key in helping them perform in line with or better than their peers.  With a TBV of $60.60, this stock is grossly priced under where it should be and so far I have no evidence that the TBV is going to suddenly decrease dramatically.  Given guidance, I'd expect TBV to grow about 6.6% in 2016.  I'm going to play more conservatively and say it'll only grow 5%.  That puts my 2016 TBV target at about $63.75.  Be it right or wrong, the trend has been that Citi can get 90% of TBV for a stock price.  Until conditions improve, I find it exceptionally difficult for them to get higher than that too.  As such, my price target for the stock is $57.50.  Personally, I have my full position in place.  If I have free cash to work with, I could buy more shares as a position meant for trading around the core, but that's it.  Also, given the bear market we appear to be in, I don't think the stock has bottomed yet.  The charts are all extremely negative and I don't see anything in particular that provides a solid floor until the $20 - which the stock was at back in 2011 when the Greed default crisis existed.  I'm not saying the stock will go down there, given they're so much more capitalized than before, but it's still something to be aware of.  Right now, I feel $40 will provide a decent floor.  Given my 18-month or longer outlook, I think the company's prospects are good and that's why I rank the stock a 2.  Let's see things settle, then maybe you can move in.