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 second quarter earnings results of $1.24 on $17.55B of revenues.  Earnings beat street expectations of $1.13 rather significantly, however, the top line missed expectations of $17.67B.  All results and expectations continue to be below what was reported a year ago.  While it should be recognized that a portion of the lower earnings is a result of the company continuing to sell off assets that is part of their Citi Holdings portfolio (a group of assets they don't feel fits the company's core competencies), this is also the story for the sector as a whole as gains from trading continues to be volatile and the key metric for revenues, the Net Interest Margin (NIM) continues to fall due to lower interest rates.  Last quarter, Citi's NIM was down to 2.86% from an estimeated 2.95%.  They estimated a lowered NIM on the year to 2.92% from 2.95%.  Personally, I think it's going to be below 2.9% and this needs to be taken into consideration.  To compensate for some of those losses, we are starting to see signs of increased lending, due to the incredibly low rates we're currently at.  Volume can compensate, but only so much.  And as such, banks continue to be under priced in the market compared to what they're worth or earning.  Tangible Book Value has increased to $63.53 - leaving results to be ahead of my expectations.  The book value seems to have little meaning at this time, though.  There's just not enough demand for the amount of stock out there -  especially when banks are seen as an area people don't want to be in right now.  

As for me, I'm glad to see expectations beat and would like to see revenues start to flatten, if not turn around.  Unfortunately events like Brexit make US Treasuries delectable to everyone outside of the US and there's just not enough of them out there to prevent rates from suffering from the pressure we're currently seeing.  This stock was selected, knowing it was going through some rough times, because I see much more profit in the longer term.  Although I'll easily state that I didn't expect to see the under performance continue as long as it has, I don't see this being a continued normal for rates or bank stocks.  Instead, I feel this is a stock that needs to be loaded up on - especially as it gets to $40 or lower.  Mr. Corbat does seem to have things going in the right direction from an execution perspective and the recent results from this year's stress tests has allowed a meaningful increase in capital returns to the shareholder via dividends and share buybacks.  If Citi can capitalize on the share buyback program at low prices, we could start to see some of the stock oversupply removed - allowing it to be priced more in line with its peers.  I maintain my recommendation of a one for the stock, caveating with my previous statements as to the ideal prices to buy at.  For now, I'm maintaining my TBV target of $63.75 and my estimation of multiple to that being 0.75 given the stress of the sector and on rates.  This multiple can be increased to 1.4 times, should things change for the better.  This leaves a 2016 price target range of $48 under these circumstances.  Clearly I have room for higher prices, should that happen.  Down side risk is in the $37-$40 range.  I'm starting to estimate TBV for 2017 around $70.  This is preliminary and could be under estimated depending upon how high it gets in 2016 and how much stock is repurchased.  Still, my 2017 targets, given current circumstances, is a multiple (price to book) of 0.85 and a price target of $60.

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.