Earnings Preview: Citigroup
Jamie 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) reports results for the quarter ending September 30, 2012 on Monday. Wall Street expects the company to make 96 cents per share in the period. That estimate is a penny per share higher than where the number stood 90 days ago. The company has bested expectations in 3 of the last 4 quarters including an 11 cent per share beat in the last quarter. Shares of Citigroup have gained nearly 30% in the last year of trading. Analysts expect profits to grow by 12% from the current year to the next. At current prices shares of Citigroup trade for 8.5 times 2012 estimated earnings.
The Federal Reserve is hell bent on making sure the big banks make money and lots of it. QE Infinity and the promise of low interest rates for the next two years essentially make the large bank a no brain investment decision. Are there issues? Of course, the risk of a recession is very real and so too are further reductions in asset valuations that could impair balance sheets and raise issues regarding capital requirements. There is also the risk of litigation with respect to the collapse of the housing market. The government announced on Tuesday that it was going after fellow large bank, Wells Fargo (NYSE: WFC). The exposure to Wells Fargo could be in the billions of dollars, but the company is not likely to settle this suit any time soon given the witch hunt nature of the the action. Despite the sensational headline of the suit, shares of Wells were flat after the news was announced. It would seem logical to imply that Citigroup faces the same risk.
Risk aside and focusing solely on valuation it would seem almost a no-brainer to own Citigroup at these levels. Investors looking for a read on Citigroup for Monday can take a look at JPMorgan (NYSE: JPM). Over the last year Citigroup and JPMorgan have tracked similarly with respect to share price volatility. What JPMorgan does when it reports Friday will likely be what takes place with respect to Citigroup. JPMorgan is trading more or less at a price to earnings ratio that equals its expected profit growth for next year. On that basis, Citigroup would be the more attractive candidate to own at the moment. There is no sign that earnings will be anything but spectacular for the banks. At worse they will be what bank earnings should be: boring.
Look for shares of Citigroup to move gain 10-15% over the next 12 months. With the Federal Reserve priming the bump, owning banks and more importantly the right banks is like shooting fish in a barrel. I would suggest that Citigroup is one of the right banks to own.
If you like the idea of trading stocks based on earnings reports make sure you check out my free report: 10 Surprise Blowout 3rd Quarter Earnings Trades.
Fool blogger Jamie Dlugosch does not own shares in any of the companies mentioned in this entry.