Earnings Analysis: Citigroup (C)
Last week, Citigroup announced fourth quarter earnings and FY 17 results. Overall, the quarter was solid with earnings of $1.28 and revenues of $17.25B. This compares to estimated earnings of $1.19 and revenues of $17.22B respectively. Something else to note is that these numbers are before what was $22B in charges related to new tax law changes. That $22B number was two billion more than originally expected, but it seems the market was able to absorb that without too much concern.
Looking a little deeper into the results, it was encouraging to see revenues increase across all regions, where we saw loan and deposit growth in Latin America and increases from wealth management and credit cards in Asia. Institutional revenues were down slightly due to the continued lack of volatility in the fixed income markets. Efficiency also improved over the quarter and despite the write down related to the Tax Act, the company is still on target to return $60B to shareholders via buybacks and dividends through the end of 2019, pending government agreement, of course. The other frustrating thing to see was that the Net Interest Margin (NIM) continued to head downward despite continued interest rate hikes.
Guidance was relatively muted, however, that was with only 1 interest rate hike while most analysts are looking for 3 hikes this year. It is believed that the NIM is in a bottoming process and will likely turn around as well - plus this is not a phenomenon that's happening with just Citi, so it doesn't feel like it's something management is doing poorly. Finally, the $22B write down had a major negative impact on the Tangible Book Value (TBV) with that price dropping down to $60.40. This sudden change in the TBV makes my historical calculations more difficult to assess. Clearly the stock is now well above the TBV and these write downs are happening to all of the banks, so it's not negatively impacting stock price nor does it mean that Citigroup is any less or more valued than its peers from before. It's also likely that the benefits from the tax changes are likely to accelerate the company's ability to grow the TBV over time, though I don't have a model for how much they'll be able to accomplish that. As such, I'm going to re-gear myself to earnings, at least until I know more.
The company earned $5.33 this year. I expect them to be able to grow earnings at least 11% including the impacts from stock buybacks next year, providing a 2018 earnings target of $5.92. Maintaining a current multiple of 14 is lower than the S&P 500 and most of its peers, but it might make sense yet as this company hasn't earned a premium for its performance yet - that takes time. As such, I put my 2018 price target at $83. Please note that while this is my target, it is possible that the stock will expand the multiple some as well, as banking becomes an increasingly popular sector to take advantage of economic and interest rate growth for now. Eventually we will reach a point where rate hikes will actually cool the economy, but we're not there for now.
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.
Looking a little deeper into the results, it was encouraging to see revenues increase across all regions, where we saw loan and deposit growth in Latin America and increases from wealth management and credit cards in Asia. Institutional revenues were down slightly due to the continued lack of volatility in the fixed income markets. Efficiency also improved over the quarter and despite the write down related to the Tax Act, the company is still on target to return $60B to shareholders via buybacks and dividends through the end of 2019, pending government agreement, of course. The other frustrating thing to see was that the Net Interest Margin (NIM) continued to head downward despite continued interest rate hikes.
Guidance was relatively muted, however, that was with only 1 interest rate hike while most analysts are looking for 3 hikes this year. It is believed that the NIM is in a bottoming process and will likely turn around as well - plus this is not a phenomenon that's happening with just Citi, so it doesn't feel like it's something management is doing poorly. Finally, the $22B write down had a major negative impact on the Tangible Book Value (TBV) with that price dropping down to $60.40. This sudden change in the TBV makes my historical calculations more difficult to assess. Clearly the stock is now well above the TBV and these write downs are happening to all of the banks, so it's not negatively impacting stock price nor does it mean that Citigroup is any less or more valued than its peers from before. It's also likely that the benefits from the tax changes are likely to accelerate the company's ability to grow the TBV over time, though I don't have a model for how much they'll be able to accomplish that. As such, I'm going to re-gear myself to earnings, at least until I know more.
The company earned $5.33 this year. I expect them to be able to grow earnings at least 11% including the impacts from stock buybacks next year, providing a 2018 earnings target of $5.92. Maintaining a current multiple of 14 is lower than the S&P 500 and most of its peers, but it might make sense yet as this company hasn't earned a premium for its performance yet - that takes time. As such, I put my 2018 price target at $83. Please note that while this is my target, it is possible that the stock will expand the multiple some as well, as banking becomes an increasingly popular sector to take advantage of economic and interest rate growth for now. Eventually we will reach a point where rate hikes will actually cool the economy, but we're not there for now.
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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