Sunday, April 24, 2016

Earnings 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.

Back on April 15 (yeah, I know I'm a bit slow here), Citigroup reported their earnings results for their first quarter.  Earnings beat expectations of $1.07, coming in at $1.10 however, revenues of $17.56B did miss the consensus of $17.61B.  As we knew going into the results, the quarter was much more challenging than management had expected, as were the conditions for all institutional banks.  Trading and investment banking and consumer investment services like wealth management were particularly impacted this quarter, due to investor sentiment.  The latter, in particular, felt its pain from the impacts of the fall of China's markets.  The bright spot that was called out was that accrual and transaction services grew 7% compared to a year ago and that was consistent performance compared to past quarters.  That's not exactly something I consider to be worthy of a big hurrah, but at least it's not getting worse.  Tangible Book Value (TBV) increased from $60.61 last quarter to $62.58, which is a significant increase, given my target for a $63.75 TBV by the end of the year.  

So the interesting thing, given the fact that I'm writing this two weeks after the announcements, is that since then the stock has risen about $2, and that doesn't take into consideration the additional $3 the stock rose the 2 days prior to reporting, because of the positive results from peers, such as JP Morgan & Chase.  So why has it gone up?  Was there something strong in the results or conference call that I overlooked?  Honestly, I don't think so.  Yes, Citi (and many of their peers) beat on expectations.  Those expectations, however, were lowered during the course of the quarter due to pre-announcements that things weren't going well.  Occasionally you may see a stock rise some after beating lowered expectations, but not usually like this over a more prolonged period.  Instead, I heard other things being told that I believe people are connecting to.  First, Citi was the one bank that had favorable results for the living will review held by the Fed and FDIC.  That helps lead people to believe that Citi is well positioned for CCAR, which was recently submitted.  Those are good things, but not good on this kind of scale.  Instead, the more important pieces I heard involved statements around how numbers that are declining, are improving (they're not going down as much as they used to be), some areas have signs of some improvement, the second half of the quarter saw improvement, and costs continue to be cut to assure they're running a lean organization.  Essentially what you are seeing is the beginning of a turn around.  Things aren't continuing to get worse, while there is risk in front of them, there are also opportunities in the name of future rate hikes.  Cost structures are under control and well managed.  Risks are also clearly identified and appear to be waning for now (impacts in the energy industry due to low oil, which has risen to over $40 now a primary factor).  All of this puts people in the position to start thinking "maybe now is the time to start working at getting into this stock/sector.  Downside risks appear to be minimized and if rates and market conditions do start to normalize, there's a lot of upside potential.  Value managers start looking forward to possibilities and become willing to slowly pile in, knowing it could take another year before things really get going, but at least they're getting in when the most money could be made.  This is why I think banks are performing well.  Expectations have been lowered so far that now things are starting to look better, if not good.

I've held the stock through all of this.  I can't say I properly saw the risk and decline from when Citi was priced in the 50s, I also didn't see the drop from $47 to the upper 30s.  Long term I saw a lot of value.  Sure, in hindsight I probably could've helped my portfolio some by making some moves, but in the end my investment thesis of the returning strength of banks is "intact."  I say that loosely because it's not right to make it sound like I planned for all of this.  It's been difficult holding this stock the last 2 years.  It's been a drag on my portfolio that I could've potentially avoided.  That said, this is my position now.  I still see the stock having a favorable future, though 2016 may still have some difficulties.  Nothing from this quarter changes my targets as the TBV is still on path (though potentially ahead of schedule) for my $63.75 target.  Even after this big raise, the stock only trades at 75% of TBV as I write this.  I still see potential for it to grow to closer to 90% of my TBV target in 2016.  If business and market conditions do continue to improve, then I believe we'll see a future where people will be willing to pay equal or higher prices for the stock than the sum of its parts.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.