Do This Mega Bank’s Q2 Results Mean It Is Still a Buy?
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) has more than doubled in price over the last year, as U.S. stocks generally have done well and investors have become more confident in the safety of the bank’s assets. The stock still trades at a considerable discount to the book value of its equity, with a P/B ratio of 0.8. According to the results that Citigroup has released for the second quarter of 2013, non-interest revenue rose strongly during the quarter versus a year earlier, and with the bank’s operating expenses actually coming in lower than they had been in the prior-year period, earnings were up 23%. This was also a small increase in net income on a q/q basis.
On an adjusted earnings basis, Citigroup earned $2.57 in the first half of the year, and if that figure is annualized, it yields a P/E multiple of only 10. Considering that the price-to-book multiple suggests that the stock is undervalued compared to its assets, investors could certainly make the case that Citi is still a prospective value stock. Even if the improvement in its earnings compared to the first half of 2012 is mostly a one-time increase, and bottom-line growth is limited going forward (which investors should probably assume in the name of conservatism, particularly with the lower profit growth rate relative to Q1 of this year), as long as the company sustains its current business it would be attractive in earnings terms.
Who owns it
As part of Insider Monkey’s work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year), we track quarterly 13F filings from hundreds of hedge funds. We can also use this database to look up which notable investors are interested in particular stocks. Billionaire David Tepper’s Appaloosa Management reported a position of 8.5 million shares in Citigroup as of the end of March of this year (see Tepper's stock picks), while Citadel Investment Group, managed by billionaire Ken Griffin, disclosed ownership of 6.7 million shares (find Griffin's favorite stocks).
Comparing Citigroup to its peers
Morgan Stanley is more of an investment bank, but Citi’s recent growth was driven by non-interest activities, and therefore, this company is a reasonable peer. Indeed, Morgan Stanley recorded more than 20% revenue growth last quarter compared to the second quarter of 2012, and net margins were wider as well. It has also more than doubled in price in the last year, and currently, the forward P/E is 11. It and Bank of America, however, have seen weak earnings over the last year as a whole. The sell-side is optimistic on Bank of America: it too trades at 11 times consensus earnings for 2014, and its second-quarter results were good as well. Its P/B is actually lower than Citi’s, at 0.7, though investors would want to look into how much further its earnings will have to rise in order to hit analyst targets.
Investors are a bit more confident in JPMorgan Chase’s book values; that bank’s P/B ratio is 1.1. However, the bank is priced at a discount to Citi on a trailing basis: the trailing earnings multiple is 9, and its revenue and profits have also been growing at double-digit rates from their levels a year ago. JPMorgan Chase, therefore, looks fairly interesting from a value perspective as well.
Wells Fargo’s price-to-book ratio is a relatively high 1.6, and, at least going by analyst expectations, it is also among the priciest of these banks in terms of its forward earnings with a P/E multiple of 11. Wells Fargo does have a reputation as a somewhat safer bank, and clearly, it is able to generate income from its assets more effectively than its peers, but it seems to be a lower priority target for value investors.
It’s possible that large financials won’t be able to sustain their current level of earnings in the future, particularly if monetary policy becomes less accommodative, but at least at this point, the industry is characterized by low earnings multiples (and even low P/B ratios in some cases as well). It’s, therefore, certainly possible that Citigroup and its peers have further upside potential at current prices.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in Morgan Stanley and Citigroup. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!