Is Citigroup a Good Stock to Buy Right Now?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Citigroup (NYSE: C) is up 27% year to date. While many investors are becoming more concerned about a slowdown in growth, they are simultaneously becoming less concerned about problems in the financial sector (and, in particular, less concerned about financial institutions’ exposure to Europe). Even with this rise in prices, however, Citi is still low priced according to conventional measurements of valuation. The market value of its equity has edged up compared to the book value, but the bank’s P/B is still 0.6. While we do think that investors should be skeptical of the declared prices of the assets on Citi’s balance sheet, and therefore that it should trade at a discount to book value, this magnitude of a discount is probably too high.

We can also value Citigroup based on earnings multiples: Its trailing P/E is 10, and its forward P/E based on analyst estimates for 2013 is 8. The sell-side is actually quite optimistic about Citi’s prospects, expecting good earnings growth over the next several years; the five-year PEG ratio is 0.7. As with book value, we are going to be skeptical of analyst estimates, but even the trailing earnings multiple would generally be reasonable. We are worried about Citi’s recent business performance; in the second quarter of the year, revenue declined 8% and earnings were down 12% from the same period in 2011. This isn’t particularly company-specific, as many large banks have been seeing poorer business conditions, but along with Citigroup’s sensitivity to general economic conditions it provides a good reason for the stock to still be trading where it is.

Citigroup was the most popular bank stock among hedge funds in the second quarter of 2012, and was actually #4 out of the entire stock market according to our database of 13F filings (see our full rankings). Two hedge funds that added shares were billionaire David Tepper’s Appaloosa Management and D.E. Shaw (whose founder is also a billionaire). Appaloosa increased its stake by 52% to 9.3 million shares (it was one of the fund’s five largest positions at the end of June) while D.E. Shaw more than doubled the number of shares in its own portfolio to a total of 1.8 million. Find more of billionaire David Tepper's favorite stocks and research more stocks that D.E. Shaw owns.

Bank of America (NYSE: BAC), like Citigroup, trades at 10 times trailing earnings and at a large discount to the book value of its equity; in fact, Bank of America’s discount is even larger as its P/B ratio is only 0.5. The two banks are also about even in terms of market capitalization, and Bank of America joined Citi as one of the most widely owned stocks among hedge funds at the end of June. However, Wall Street analysts are less optimistic about Bank of America; perhaps they feel that Bank of America’s problems are due more to its internal affairs and sprawling portfolio of businesses, while Citi’s issues are due more to its exposure to an improving (in their eyes) Europe.

Citigroup can also be compared to JPMorgan Chase (NYSE: JPM), HSBC Holdings (NYSE: HBC), and PNC Financial Services (NYSE: PNC). The first two of these banks trade at forward P/Es of 8, actually even with Citi’s, despite the fact that at least JPMorgan Chase has a stronger brand, pays a 2.95% dividend yield, and is likely still suffering from investor overreaction to the London Whale losses. JPMorgan Chase does carry a P/B of 0.9, so on that basis it is priced at a premium relative to Citi, though still cheaper than its book value. HSBC increased its earnings last quarter over the same period a year earlier despite lower revenues, and it trades right at its book value. It too could be safer than Bank of America and Citigroup while still trading at a fairly low multiple. PNC trades at trailing and forward P/Es of 13 and 9, respectively; on an absolute basis, these are not very high but they do represent a premium to these larger banks we’ve discussed, and the company’s earnings dropped 41% in its most recent quarter compared to the same period a year ago.

Dig Deeper

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Citigroup. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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