How do you know when a business is poorly run? When the U.S.
government pumps $20 billion in it just to keep it going.
That, in a nutshell, explains why legions of investors will never,
ever invest in
[block:block=16] That's a shame, because Citigroup these days is a
far better bank than before, taking on fewer risks and pursuing
more sound growth strategies. For investors willing to move beyond
the whole banking bailout mess (in which Uncle Sam still profited
anyway), then they need to give the sector -- and Citigroup in
particular -- a fresh look.
I've been watching Citigroup for almost two years. And though the
banking giant is far from a picture of health, it is on a much
better trajectory. The bank just reported another challenging
quarter, yet it also appears that the stage is set for a slow and
steady rebound in quarterly results. A year or two from now,
investors may be stunned to see a company that is boosting profits
at a sharp pace.
I'm adding Citigroup to my
$100,000 Real-Money Portfolio
now, because I want toprofit from the coming change of sentiment --
before it happens.
The cart before the horse
Citigroup'sCEO , Vikram Pandit, laid out a fairly
impressiveturnaround strategy nearly two years ago: Unload
underperforming divisions and assets, and redirect funds to the
most promising opportunities. Broadly speaking, he wanted to
de-emphasize the mega-bank's exposure to the troubled U.S. consumer
while boosting Citigroup's presence in the most dynamic regions,
such as Asia and Latin America.
That's a wise long-term plan, but Pandit put the proverbial cart
before the horse, neglecting to put Citigroup in lean shape before
pressing ahead. Plannedasset sales are taking longer to
materialize, and the bank has had a still-bloated cost structure in
the United States. Meanwhile, costs also rose quickly in foreign
regions in a bid to quickly establish a major presence. So during
the past year,shares have muddled along in the face of too-high
expenses and weak quarterly reports.
Here's the good news: Citigroup is tackling its cost-structure more
aggressively. The better news: Citigroup's revenue streams have
found a floor, and slowly rebounding revenue should pair up well
with falling expenses. The best news: Struggling European banks are
so fixated on the troubles in their home markets that they'll
represent minimal competition for Citigroup as its pushes further
into international markets.
With all of these items taken together, Citigroup has the makings
of a surge inearnings that few are talking about right now.
Let's take a closer look...
On the matter of expenses, Pandit had expected U.S. operations to
look stronger by now, led by rising investment banking fees and a
moderate rebound in commercial and consumer lending. So he was
loath to keep cutting after Citigroup's radical downsizing in 2009.
The bank'soverhead expenses shrank from $31 billion in 2008 to $25
billion in 2009, where they've stayed ever since. The bank has
generated more than $10 billion innet income in 2010 and 2011, but
that still pales in comparison to the $21 billion to $24 billion
that Citigroup made in the middle of the last decade. Pandit now
understands that 2012 may represent another year of subpar growth,
so his $2 billion of recently-announced cost cuts should help boost
profits in the near-term.
Indeed, for the remainder of 2012, investors may get more excited
about Citigroup'sbalance sheet than itsincome statement . The bank
finished 2011 with 11.8% in Tier 1 Capital, which is core equity
divided by risk-weighted assets (i.e. loans and investments in
other entities). Regulators like to see this figure above 8%, and
Citigroup has been so focused on boosting its score that it now
arguably has too much capital. That's whyWall Street says Citigroup
will look to deliver dividends and stock buybacks in 2012.
(Citigroup offers a tiny quarterly one-centdividend now, but some
say it could go to $0.10 this year and perhaps $0.20 by 2013).
Looked at another way, investors are finally realizing that
Citigroup'sbalance sheet is so strong, and its operations are now
so stable, that fears of another 2008-style meltdown should be a
diminishing concern. As a result, Citigroup's stock should slowly
work its way back to tangiblebook value , or from a current $32 up
to $48. That's a 50% gain right there, just on thebook value angle
More importantly, Citigroup is sufficiently healthy, despite subpar
revenue growth, that net profits are likely to stay above $10
billion each year. This meansbook value would climb into the low to
mid-$50s by the end of this year and nearly $60 by late 2013 or
sometime in 2014. Simply moving up to thatbook value in the next
12-18 months would help this stock nearly double.
Risks to Consider: T
here's an event on the near-time horizon you'll need to
monitor. In mid-March, Citigroup will have reviewed its capital
base, internally stress-testing its operations to be sure there are
enough funds to handle any future global economic shocks. Any
excess capital will likely be put to work by management, probably
in the area of dividends and buybacks as noted above. If the
results are a shock, then these plans might be delayed.
The Downside Protection -->
Trading so far below tangiblebook value ,shares are unlikely to
pull back much from current levels unless the European economic
crisis spirals out of control. A move to hike thedividend or
institute a stock buyback (which could absorb almost 10% of the
current share count) would be weapons to defend the stock if it
comes under deep pressure as it did last summer.
Upside Triggers -->
The stock simply moving up to tangible
is the clearest path to upside for the next 12-18 months. Yet
during that time frame, the "new Citigroup," which is emerging as a
major player in Asia and Latin America, will come into focus. Few
are talking about growth for Citigroup right now, but emerging
economies continue to build strength, and the U.S.economy --
especially housing -- will likely start to look a bit better in
2013 and beyond. As a result, the stage is set for Citigroup to
become aprofit powerhouse in coming years.
Analysts sayearnings per share (
) will rise around 10% this year to around $4.10, and forecast
low-teens growth inEPS to around $4.70 by 2013. With just a few
small breaks, Citigroup'sEPS could quickly work up to $6 by 2014 or
2015. That's a pretty far time horizon, but worth thinking about
for a stock that trades in the low $30s. One day, whether it's 12
months from now, 24 months from now or 36 months from now, this
stock could well trade up to 10 times that mid-cycleprofit
forecast. That again implies a $60price target , nearly double
where it sits now, supported by that rising book figure analysis.
Action to Take -->
48 hours after you read this, I will buy 300shares of Citigroup
(worth roughly $10,000) in my real-money portfolio. It's a bold
investment, rivaled only by
in size in my portfolio. This reflects my conviction that
Citigroup's toughest sledding has already passed, along with the
risk associated withshares , and that slowly brightening skies lie
My last real-money portfolio pick, Exide Technologies, was down
sharply on Monday, Jan. 30, the day I wrote about it. As always, I
give readers two days' notice before I actually make a purchase. On
Wednesday, Feb. 1, the stock went on a tear, gaining 11% from when
I originally wrote about it. This means if you bought in when I
first wrote about Exide, then you're already sitting on a
double-digit gain, and your gain is likely even bigger than mine.
And this isn't the first time that's happened. I don't know how
long the streak can continue, but it's just another reason why I
absolutely urge you to sign up and have these articles delivered to
your inbox as soon as they're published.
Go here to sign up
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F, XIDE in one or more if its "real money"
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