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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


March 15th 2016


NYSE Symbol: C

Industry: Banking

Price as of 3/15: $42.68


Beware of the Ides of March. An ominous day in history, but March so far and February as well have been kind to the markets. After a nasty January, the major averages have clawed their way back toward the unchanged level for the year. Going forward, oil will have a lot to do with where the averages go. The fundamentals for oil are not good with supply running out of space for storage. If we get another drop in oil or a spike in the US dollar, the averages may struggle once again. In the meantime, there are plenty of attractive stocks and one sector in general that looks very attractive, the financials. The financial sector has lagged the S&P 500 down 5.6% compared to the market index decline of less than 1 percent. While many bank stocks are trading far below their respectively declining 150-day moving averages, some are showing signs of life. This week we'll highlight a large cap bank with International exposure. The stock of the week is Citigroup. Built by Sandy Weill and the CEO of JP Morgan, Jamie Dimon, Citigroup did not fare well in the financial crisis diluting the stock with billions in new shares to prevent bankruptcy. Reversing the previous stock split, the stock would only be trading at $4 and change. But even though the stock may never get back to its previous highs, the stock is still attractive. Trading at less than 10 times earnings and 30% below tangible book value pf $60 a share, the cheapest valuation of all the big banks, Citigroup's stock has the possibly of 50% upside in the coming years with a more normal economic environment.


Back in January, Citigroup reported fourth quarter earnings. Earnings came in at $1.06 per share, in-line with estimates. Revenues rose 4% year over year to $18.46 billion ahead of estimates. The increase in revenue was driven by a 61% increase in Citi Holdings, partially offset by a 2% decrease in Citicorp revenues. Citigroup's net income increased to $3.4 billion in the fourth quarter, primarily driven by the higher revenues and lower operating expenses, partially offset by a higher cost of credit. Citigroup's operating expenses decreased 23% to $11.1 billion in the fourth quarter 2015. But Wall Street is more concerned about bad loans. Citigroup set aside $588 million to cover loan losses in the fourth quarter of fiscal 2015. Management said that about 50% of those reserves were directly tied to the energy sector. In the fourth quarter, the bank's nonaccrual corporate loans increased 32% year over year, to $1.6 billion, mostly because of energy sector debt. The company is expecting a cost of credit of $350 million in the first quarter higher than the $250 million in the fourth quarter, most of which was related to energy loans. Citigroup has roughly $20.5 billion of energy sector loans on its books, or roughly 3.3% of total loans yet the stock is acting like the exposure is much higher.


At current valuations, Citigroup trades for 0.6 times sales, 8 times earnings, 7 times 2016 earnings with a modest dividend of 0.5%. As mentioned, Citigroup trades at a 30% discount to tangible book value of $60 a share, the cheapest valuation of all the big banks. Just this week the Barclays analyst said at current valuations, Citigroup has limited downside, particularly given numerous structural changes it has undertaken post the financial crisis, and can build the case for meaningful upside even in a slower growth environment. The analyst did admit that near term trading and investment banking revenues may be under pressure, but long term the valuation and fundamentals should provide strong capital appreciation potential for Citigroup shareholders.