Farting Camel’s Guide to Citigroup

April 29th, 2010 Posted by Stocks No Comment yet

 

Farting Camel’s Guide to Stock Picking – Citigroup, Inc (C)

Citigroup stock price has been very active lately not to mention how widely priced; trading as high as $5.06 to a low of $4.38 – just within the last month.

(Note: I assumed that readers do have access to Google finance or other finance media to look up company profiles and financial data.)

COMPANY

Citigroup, Inc. (C)

ANALYSIS

(1)   Return on Equity (RoE)

Citigroup is like two separate companies when I look at the performances of the company; one prior to the 2007 and another after 2007.  Prior to 2007 the company posted excellent and consistent returns averaging 16.7 percent.  However due to recent year’s performances the overall 10 years return was dragged to a low of just 9.7 percent.  The recent 5 years return is 4.9 percent; indicating a definite downtrend.  Worst of all, Citigroup loss money in both 2008 and 2009.

It doesn’t take a genius to see the trend – we just went through a major depression and the economy is still trying to recover.  In normal circumstance I wouldn’t even bother writing about a company going through a downtrend. However, the current circumstance is nothing close to normal.  Regardless, Citigroup is not making the grade in the returns area.

Grade: Fail

(2)   Intrinsic Value

Valuing Citigroup is more difficult than most companies; I have to side more on the art of valuation rather than on the science.  Why? Because if I strictly follow my model the valuation of the company is very low – indicating that perhaps the stock is trading at valuation, with a target buy price of around $3.9 per share.

However, I can’t simply plug in the numbers from the past years and ignore the potential return to a more normal circumstance in the banking sector – one in which Citigroup has a better then good chance of making a profit; the company did announced a $4.4 billion net income in Q1 2010 on April 19, 2010.  Perhaps things are turning around for Citigroup. As a result, I think in a normal market Citigroup is worth a lot more than $3.9 per share – my valuation for Citigroup is around $11 per share.

Grade: Pass

(3)   Relative to Market

If you were the few fortunate and brave souls you could have purchased the company in 2008 at around $36.7 billion or $6.69 per share – price was prior to the dilution of the stocks in 2009.  The company has since increased the number of shares outstanding from 5.5 billion in 2008 to 28.5 billion shares in 2009. Even though current price is trading lower than in 2008 the outstanding shares are much more; hence market value is higher.  (Market value of the company is price per share multiply by shares outstanding.)

Currently, the market value of Citigroup is at $132 billion or $4.64 per share – considering the net current asset of $475 billion I think there is room to maneuver if there is a second wave of economic setback.  Citigroup holds a $293 billion loan portfolio at the end of 2009; if they are right about their potential loss being under 6.5 percent or just under $20 billion, Citigroup could still safely cover current cost. The company has $25 billion ‘cash and due from banks’ at the end of 2009.

On the upside, from 2003 to 2007 the company market value has never been this low.  I think with the current restructuring; returning to its core banking business is going to help Citigroup in the long run.

Grade: Pass

(4)   Ethical Issues

Corporate governance in my mind is okay.

Executive pay is another story, Mr. Vikram Pundit, the current CEO earned $128 thousand in 2009; a far different scenario as compared to his pay in 2008 which toped at $38 million.  I still can’t understand the rationale behind executive compensation with regards to companies receiving TARP money.  Sure, Mr Pundit is only making $128 thousand but his subordinates like Mr. John Havens earned $11.2 million in the same year (2009) when the company overall loss $1.1 billion.

Grade:  Fail

SUMMARY

Citigroup fail to meet the grade required.  The stock is not cheap when I take into account the valuation.  In addition, the company performances in recent years are troublesome.  Lastly, I hate to buy financial institutions because in the past management takes most of the profit away from shareholders.  Nevertheless, I did purchased this stock for my portfolio as I can’t see any reasons why Citigroup can’t compete in the global economic recovery now and in the next few years; after the recovery is a different story.  In addition its net current asset exceeds its current valuation; a sign that the stock is worth more.

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