Citigroup's beta is high as it is in transition stage. It has completed more than 30 divestiture transactions since the beginning of 2009, including Smith Barney, Nikko Cordial Securities, Nikko Asset Management, Primerica Financial Services, various credit card businesses, Diners Club North America, and The Student Loan Corporation. Citi Holdings' GAAP assets, at December 31, 2010, were $359 billion (about 19% of C's total assets), down from $421 billion (21%) at September 30, and down from $487 billion (26%) at December 31, 2009.
Citi's Q1-2011 results may not disappoint investors
Citi's fourth quarter results were a huge disappointment. As a result, its shares are trading below the closing price on a day prior to the results announcement. Analysts' consensus EPS forecast for Q1-2011 is better than the reported EPS for Q4-2010. For the fiscal quarter ending March 2011, the consensus EPS forecast has remained the same over the past week at $0.100 and remained the same over the past month at $0.100.
For the fiscal year ending December 2011, the consensus EPS forecast has remained the same over the past week at $0.440 and increased over the past month from $0.430 to $0.440 (2.33%). Of the 3 analysts making yearly forecasts, 2 raised and 1 lowered their forecast. Moreover, over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 7%.
Though fourth quarter was a disappointment in terms of EPS, nevertheless it showed some positive signs as well. For instance, Q4-2010 net credit losses of $6.9 billion were down $805 million sequentially, or 11%, marking the sixth consecutive quarter of decline. I am optimistic that, the company will continue to see improvement in its asset quality in the US. However, the company could see deterioration in its Japanese assets.
Tangible book value development has been declining since the end of 2009 and appears to have a reached a near term equilibrium range of $5.3 to $5.5. Based on tangible book value, the stock is currently trading at a discount of 27.6%. However, I don't expect convergence between market value and book value in the near term. But, I concede that long-term value in the franchise is rising.
Citi's cup of legal and regulatory woes continue to overflow the brim
Citigroup Inc. is one of the three money center banks that could face fines from a regulatory probe into the industry's foreclosure practices. The statements, made in regulatory filings on February 25, 2011, are the most direct admission yet from major banks that they could have to pay significant amounts of money to settle probes and lawsuits alleging that they improperly foreclosed on homes.
Last month, The Allstate Corporation sued Citigroup Inc. accusing it of causing losses by hiding the risks on more than $200 million of mortgage securities it bought.
In January 2011, Indian police filed cases against 11 top Citigroup Inc. executives, including Chief Executive (CEO) Vikram Pandit, in connection with the INR3 billion ($70 million) alleged fraud at a Citibank branch in a New Delhi suburb.
Legal problems could continue to surprise in the near term.
Net on net
Despite, some volatility in earnings and legal issues, I continue to see C as a reasonably good stock to invest at current levels. In the last 12 months, insider buys outnumber (89) insider sells (50). In the last 3 months, insider buys outnumber (41) insider sells (18) – this means insiders are increasingly viewing the stock positively. Institutional players are also viewing the stock positively. For instance, Institutional investors' increased positions (694) in the stock outnumber decreased positions (441). With a target price of $4.92 and stop limit/trailing stop limit of $4.49, I think there is a good upside trade with a profit loss ratio of 4.3 to 1. If the stock breaks $5 barrier then with a target price of $5.02 and stop limit/trailing stop limit of $4.3, I think there is an excellent upside trade with a profit loss ratio of 5.4 to 1.
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