This bank has seen better days, but its global presence and brand name should boost its turnaround potential. The shares are currently trading at a discount.
Citigroup (C)
from The Turnaround Letter
When Citigroup (C) began to stabilize in 2009, it split into two business units: Citicorp, which contains most of the company’s core retail and institutional client businesses, and Citi Holdings, which includes the asset management and brokerage businesses as well as other assets that it planned to sell off. In 2012, former CEO Vikram Pandit, who came from the hedge fund world, was replaced by company veteran Michael Corbat. Corbat has focused on strengthening Citi’s core businesses and divesting non-core and unprofitable assets, and the company is making good progress on both fronts.
On the core business front, Citi retains a strong global presence and a powerful brand name. More than half of its business comes from outside North America, with an increasing portion from high growth emerging markets. Moreover, management is actively working to improve efficiency by reducing expenses and reallocating resources. In this regard, it is continuing to streamline products and services, as well as consolidating platforms and processes.
On the non-core front, management has reduced the assets in Citi Holdings by almost 50% from 2011 through 2013 and brought the unit’s bottom line up to break-even. Most of the remaining assets in Holdings are mortgages, and the company plans to sell them opportunistically as the mortgage market continues to improve.
From a valuation perspective, Citi looks cheap, both historically and compared to its peers. It currently trades at 0.85 times Tangible Book Value (TBV) compared to 1.7 times for other large banks. During the period 1993-2007, Citi traded at an average of 3.5 times TBV. Moreover, Citi’s TBV should grow as the company continues to re-focus its businesses. On an earnings basis, Citi currently trades at 10 times estimated 2014 earnings, compared to more than 15 times historically. It is also worth noting that rising interest rates would give a nice boost to the company’s earnings.
While the Fed recently denied Citi’s request to increase its dividend and share repurchase program, we believe that Citi will be able to get the Fed’s blessing in the not-too-distant future. In the meantime, the denial gives investors a good opportunity to buy the stock cheaply. We recommend buying Citigroup up to 65.
For Aggressive Investors: There are Citigroup warrants trading that are remnants of the government’s TARP program in 2008-09. These warrants, currently priced around 0.61, have a strike price of 106.10 and an expiration date of January 2019. While the warrants are still well out of the money, they have a lot of upside leverage if the stock can get above the strike price before 2019.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, May 2014