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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.

Farting Camel’s Guide to Stock Picking – EOG Resources

April 7th, 2010 Posted by Stocks No Comment yet

This morning I received a lot of email alerts for EOG from my broker.  Perhaps it is a good time for me to focus on this company today.

Note: I assume that reader does have access to Google finance or other finance media to look up company profiles and financial data.

COMPANY

EOG Resources, Inc. (EOG)

ANALYSIS

(1)   Return on Equity (RoE)

Sales have been disappointing for 2009; it reverted to 2006 level while the net income was even worst – about the same as 2003-04 level.  Much worst is the earnings per share (EPS) . It has been diluting shareholders ownership since 2002.

The results are much better if you were to exclude 2009 results. The performance for the past 10 years as well as the most recent 5 years have been superior – averaging around 20 percent.

Grade: Pass

(2)   Intrinsic Value

Book value has been increasing at the rate of 20.9 percent in the last 10 years.  The company earns 20 percent on equity.  Using my discounted cash flow model I placed the intrinsic value for EOG at 201.  That means I would buy the company stock whenever the price is below 120.7. The price as of April 6 is $97.

Grade: Pass

(3)   Relative to Market

EOG market capitalization at the end of 2009 is about equal to 2007 level.  While its revenue and net income are much lower; the company earned a lot less in 2009 compared to 2007  and close to the earnings in 2004.  Outstanding shares have been increasing since 2002 from 229 million shares to 252 million shares in 2009. Book value has been increasing steadily from 2000 at 1.3 billion to 9.9 billion in 2009.  Quick ratio seems to be improving since 2007 at a low of  0.88 to what is now 1.37.

In the last 10 years, the prices of EOG have been hovering in the range from 25.8 to as high as 145 per share; putting the market value of the company at a peak of 36.1 billion in 2008.  Since then the market cap has gone down, trading in a range from 11billion to 25.6 billion for 2009. It is amazing the range that EOG stocks trades for: in 2008 the range was 13.5 billion to 36.1 billion. Interestingly, EOG net current asset at the end of 2009 was 24.5 billion; if you were diligent you could have purchase the stock for less than half (11/24.5) of its net current assets (cash, short term investments, receivables, and inventory). What a deal!

Grade: Pass

(4)   Ethical Issues

I don’t like to see the Chairman and CEO, Mark G. Papa being the same person.  The board is annually elected so I can over look this point.  They seem to have a policy in place for related party transaction.  I also get very uneasy when it comes to executives pay.  EOG pays the Chairman and CEO 7.9, 13 and 23.4 million for 2006, 2007 and 2008, respectively.  That is a lot of money in relative to other executives’ pay.  The net income of the company drop 13 percent in 2007 but Papa’s pay increased 64 percent; go figured!  Who do you think the compensation committee works for… the shareholders? You wish.

Even though EOG has issues in this area, their overall corporate governance is good enough to pass.

Grade:  Pass

SUMMARY

This analysis was done a few months ago; the recent buzz expedited this post.  I did purchase this stock for my portfolio a while back.

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