Earnings Analysis: Citigroup (C)
Thursday morning, Citigroup announced third quarter earnings results. They topped analyst expectations by delivering earnings of $1.42 and revenues of $18.1B. Expectations were at $1.32 and $17.89, raised slightly more from where it was at when I previewed the results in my last weekly summary. The company returned $6.4B in capital over the course of the quarter, a majority of that represented through the repurchase of about 81 million shares of stock. The TBV also rose 6% from a year ago, landing at $68.55 which is in line with my estimates for where that key measurement is going. Despite the solid beat, the stock's price has fallen about 5% since the announcement.
In Global Consumer Banking (GCB) we saw revenue increases across all regions, with Latin America leading the way. in North America, the Costco card acquisition provides much of the experienced strength, but it also brings much of the increase in Net Credit Loss (NCL) growth. Expenses and gross margins also improved globally. Meanwhile the Institutional Clients Group (ICG) also performed well, delivering an 11% increase in revenues despite a 16% decline in revenues from Fixed Income trading. Currency and market environments were much less volatile compared to a year ago when Brexit was a huge factor to earnings. Meanwhile equities increased revenue by 16%, though this is a small base in comparison with its other areas in this group. Net Interest Margin (NIM) was flat from a quarter ago and still down from a year ago, despite the fact that the Fed has raised short term rates by 50 basis points this year.
Overall I believe these to be good results, though not great. I'm not totally surprised that people are taking profits, however, I'm also sensing a lot more fear or dislike for the quarter than seems to be justified as well. The two biggest complaints I've seen is that there was a sale of an analytics business that resulted in profits of $0.13. People are taking that out of estimates and saying the company didn't beat on top lines when, in reality, everyone knew about the sale and it was priced into estimates. So this isn't true. The other big concern I see has to do with an increase in NCLs and resulting Loan Loss Reserves. The increase in Loan Loss Reserves are reflective of North America Consumer business and specifically related to increased Costco card business. While an increase in LLR can mean danger that credit conditions are worsening and the banks are looking towards rough times, that just doesn't fit here right now - especially when you add in all of the macro information such as jobs and wage growth to the mix. Loan loss reserve increases were also a factor of 3 major hurricanes and a major earthquake in regions they serve (to a tune of $50M initial estimates).
In short, the stock ran hard into the quarter. It's up big on the year and there are people itching to take profits and to push the stock down so they can get in at better prices. When looking at the major institutional banks, Citigroup continues to be under valued in regards to its price to TBV value. While it's finally over a 1.0 on a twelve trailing month basis, it's nowhere near the 1.4 of JP Morgan or Bank of America, much less the 1.6 that Wells Fargo is getting despite all of their newsworthy woes of late. To say that Citigroup doesn't deserve a better premium than what they're getting seems incredibly short-sighted (though I would be interested in seeing more arguments against my position). The buyback program and focuses of the company should help continue to grow things in the right direction. It's clearly going to take time for the price to book ratio to get better aligned, but that also means a longer period of time that you can expect outperformance of this stock compared to the others, given an assumption earnings and revenue growth are similar. Speaking of earnings and revenue growth, as we watch the rest of the world expand, that may actually give Citigroup an advantage in that space, as they're the most globally positioned bank of the big 4.
All of these factors are changing my outlook for the stock. I maintain a ranking of 2 for the stock as the price doesn't completely represent value (although in the grand scheme, I might be splitting hairs). Personally, I'm also fully invested in this position. That said, if the stock gets below $70, I'd be hard pressed to find a reason others shouldn't buy it. In fact, it seems the stock gets a lot of support in the $70-$71 area, but a market wide selloff could push the stock down to or below TBV. Those are the things you want to watch for. My TBV estimates for 2018 remain unchanged with a target of $74. This includes impacts of share repurchases. What I do feel warrants changing, though, is the multiple on which the stock is willing to be paid. As we look at 2018, there are likely more rate increases in the future and the economies of the world continue to get stronger. So, instead of maintaining a price to book ratio factor of 1.0, I'm raising it to 1.1. This moves my 2018 price target out to $81.50. A market wide correction (which, admittedly seems somewhat due), could make this a little bit difficult to reach, depending on the duration which it lasts and the drivers behind it. As the facts change, I will adjust my position accordingly.
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.
In Global Consumer Banking (GCB) we saw revenue increases across all regions, with Latin America leading the way. in North America, the Costco card acquisition provides much of the experienced strength, but it also brings much of the increase in Net Credit Loss (NCL) growth. Expenses and gross margins also improved globally. Meanwhile the Institutional Clients Group (ICG) also performed well, delivering an 11% increase in revenues despite a 16% decline in revenues from Fixed Income trading. Currency and market environments were much less volatile compared to a year ago when Brexit was a huge factor to earnings. Meanwhile equities increased revenue by 16%, though this is a small base in comparison with its other areas in this group. Net Interest Margin (NIM) was flat from a quarter ago and still down from a year ago, despite the fact that the Fed has raised short term rates by 50 basis points this year.
Overall I believe these to be good results, though not great. I'm not totally surprised that people are taking profits, however, I'm also sensing a lot more fear or dislike for the quarter than seems to be justified as well. The two biggest complaints I've seen is that there was a sale of an analytics business that resulted in profits of $0.13. People are taking that out of estimates and saying the company didn't beat on top lines when, in reality, everyone knew about the sale and it was priced into estimates. So this isn't true. The other big concern I see has to do with an increase in NCLs and resulting Loan Loss Reserves. The increase in Loan Loss Reserves are reflective of North America Consumer business and specifically related to increased Costco card business. While an increase in LLR can mean danger that credit conditions are worsening and the banks are looking towards rough times, that just doesn't fit here right now - especially when you add in all of the macro information such as jobs and wage growth to the mix. Loan loss reserve increases were also a factor of 3 major hurricanes and a major earthquake in regions they serve (to a tune of $50M initial estimates).
In short, the stock ran hard into the quarter. It's up big on the year and there are people itching to take profits and to push the stock down so they can get in at better prices. When looking at the major institutional banks, Citigroup continues to be under valued in regards to its price to TBV value. While it's finally over a 1.0 on a twelve trailing month basis, it's nowhere near the 1.4 of JP Morgan or Bank of America, much less the 1.6 that Wells Fargo is getting despite all of their newsworthy woes of late. To say that Citigroup doesn't deserve a better premium than what they're getting seems incredibly short-sighted (though I would be interested in seeing more arguments against my position). The buyback program and focuses of the company should help continue to grow things in the right direction. It's clearly going to take time for the price to book ratio to get better aligned, but that also means a longer period of time that you can expect outperformance of this stock compared to the others, given an assumption earnings and revenue growth are similar. Speaking of earnings and revenue growth, as we watch the rest of the world expand, that may actually give Citigroup an advantage in that space, as they're the most globally positioned bank of the big 4.
All of these factors are changing my outlook for the stock. I maintain a ranking of 2 for the stock as the price doesn't completely represent value (although in the grand scheme, I might be splitting hairs). Personally, I'm also fully invested in this position. That said, if the stock gets below $70, I'd be hard pressed to find a reason others shouldn't buy it. In fact, it seems the stock gets a lot of support in the $70-$71 area, but a market wide selloff could push the stock down to or below TBV. Those are the things you want to watch for. My TBV estimates for 2018 remain unchanged with a target of $74. This includes impacts of share repurchases. What I do feel warrants changing, though, is the multiple on which the stock is willing to be paid. As we look at 2018, there are likely more rate increases in the future and the economies of the world continue to get stronger. So, instead of maintaining a price to book ratio factor of 1.0, I'm raising it to 1.1. This moves my 2018 price target out to $81.50. A market wide correction (which, admittedly seems somewhat due), could make this a little bit difficult to reach, depending on the duration which it lasts and the drivers behind it. As the facts change, I will adjust my position accordingly.
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.
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.
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