With a 12.5% decline over the past three months, the financials sector has been one of the hardest groups hit during the recent stock market correction. Citigroup (C), in particular, has taken it on the chin, shedding 20% of its value, compared to only a 9% decline in the S&P 500 index.
Remarkably, Citigroup’s decline and that of the financial sector, has come even as interest rates have risen — typically a good indicator of rising bank profits. Investors don’t care to make this correlation. It’s a new year, however, and, seemingly, a new tone by the Fed. Although there’s still a lack of consensus when it comes to assessing bank stocks, I find it hard to not like Citigroup, which is set to report fourth quarter fiscal 2018 earnings results before the opening bell on Monday.
I spoke earlier this week about cash-rich stocks, particularly those that have strong free cash flows that are growing and pay a dividend. Long-term investors who are looking for dependability and reliability can check both of those boxes for Citigroup, which pays an annual yield of 3.5%, compared to the 2.00% yield of the S&P 500 index.
What’s more, Citigroup’s stock is cheap, trading at $56, which is 30% below its 52-week high of $80.70. And not only does the stock come with a consensus Buy rating, it has an average analyst price target of $82, calling for a 46% premium in the next twelve months. As for its cash position, it’s trading at a price-to-free-cash-flow (PFCF) of 4.7, compared to the S&P 500 median PFCF ratio of 31. Why is the stock so cheap?
Investors have grown concerned about a global growth slowdown, which could impact Citigroup given the bank’s global reach. On the bright side, the bank has worked to reduce its high-risk and illiquid assets, while working to boost both revenue and return on tangible equity. And for the stock to reverse course, investors will need to see strong improvements not only within the consumer segment, but also within its investment banking segment where slowing demand for debt and equity issuances could hurt revenue.
For the three months that ended December, analysts expect Citigroup to earn $1.61 per share on revenue of $17.94 billion. This compares to the year-ago quarter when earnings came to $1.28 per share on revenue of $17.25 billion. For the full year, earnings are projected to rise 25.5% year over year to $6.64 per share, while full-year revenue of $73.63 billion would rise 3.1% year over year.
Beyond the top- and bottom-line numbers, how the stock reacts will be based on key metrics such as operating efficiency and what the management says with regards to interest rates — particularly how they envision fiscal 2019 being impacted by the Fed’s actions. And to the extent the management can convince that its global exposure is a strength, not a liability, Citigroup stock should see an immediate jump as it benefits from the overall market recovery.