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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


August 21st 2009 Citigroup
NYSE Symbol: C
Industry: Banking
Price as of 8/21: $4.70

The financials are finally rising from the ashes. The worst of the credit crisis looks to be behind us. Many investors have shunned the sector due in part to the heavy hand of government involvement. But as the fundamentals have improved, and many banks start to repay their TARP money, investors have come back to the sector. The valuations were dirt cheap with many banks priced just above bankruptcy levels. The first financials to rebound were the best positioned and well capitalized like JP Morgan and Goldman Sachs. As the rally has progressed, investors have increased their risk exposure, buying the more troubled banks. This week we'll featured the former titan of the industry which has received a number of fans of late. The featured stock of the week is none other than Citigroup. Citigroup has inched higher every week for the last month as more and more investors warm to the stock. One of the biggest bulls on the stock is CNBC's Jim Cramer who compares Citigroup to the government's bail out of Chrysler back in the early 1980s. Cramer's price target for Citigroup is $12 a share in 2012. That would be a nice gain for investors, but a lot of things will have to go right for Citigroup in the next two years for these stellar returns to materialize.
The reason Cramer compares Citigroup to Chrysler is because of the large position held by the government. To save Citigroup from going under, the government had to provide money in exchange for shares. Currently, the government owns 34% of Citiggroup which will balloon the share count from 5.5 billion to 23 billion outstanding shares. If everything goes right for Citigroup, the company will generate net earnings in a best-case scenerio of $20 billion dollars. That translates into at best 86 cents a share. If you put a 10 multiple on the stock that translates into $8.70 a share or a double from here. But unfortunately this is the best-case scenerio. Unfortunately everything has to go right for this to work.
In the meantime Citigroup has to first, make money on a consistant basis. The economy also has to improve, including the housing and commerical property market. That may take another six months to a year to significantly improve. The other big concern with the government is their ability to change the rules on Citigroup. In the next year or two they may order the company to break it self up which may not be a bad thing, but one one really knows. And that's the biggest concern. No one really knows what will happen with Citigroup. Yes, the stock is cheap on many metrics as long as they can return to profitability. The good news is there only $4 and change to the downside so investors know the downside risk. For investors who already own it, Citigroup is a good hold while you wait to see if the fundamentals can improve. But unfortunately the once proud financial titan is not in charge of their own destiny.