Is Citigroup Underappreciated & Undervalued?

By Ryan Guenette - August 31, 2012 | Tickers: C, GS, JPM, NES.DL, STT | 0 Comments

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Looking at the current $30 area that Citigroup Incorporated (NYSE: C) is currently trading at is depressing and deflating. The stock once traded as high as $550, and was only a major rally away from becoming the largest company, in terms of market capitalization, in the history of man. After making its all-time high in 2007, Citigroup began its sharp downward move. After bottoming early in 2009, the stock has puttered along, never breaking far above $50. In 2011, the company conducted a 1:10 stock split, as their current price under $5 was unattractive to certain funds. Since this stock split occurred, the company’s stock has slowly drifted towards lows made back in 2009. Over the past year, Citigroup has risen only 0.20%, underperforming the S&P 500 which has rallied 19.87% over the same period. Still being valued at $87.68 billion on the public market, Citigroup is by no means insignificant. So is Citigroup underappreciated & undervalued, or another Lehman Brothers?

Fundamentals on the Rebound

In 2010, Citigroup reported earnings per share of $3.50. In 2014, the average analyst consensus believes the company will derive $5.00 per share from its business operations. This represents a 42.86% increase in earnings per share over a 4 years stretch. In 2009, the company’s earnings per share was -$8.00, representing that by no means is Citigroup’s business model recession proof, yet it has the ability to rebound quickly. Currently, Citigroup pays out an annual dividend of $0.04 per share, a meager amount to the nearly $20 per share it once paid out in 2008. At current prices, Citigroup’s dividend yields 0.14%. By 2014, the street anticipates Citigroup’s dividend to reach $0.81 annually, which at current prices would put the dividend as yielding 2.70%. From this we can see Citigroup’s ability to rebound after disaster strikes, as well as its meager dividend that should sprout into a sizeable one in a few years.

The chart below displays Citigroup’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

An Underlying Lack of Confidence

At the current moment, Citigroup trades on the New York Stock Exchange with a value of $86.68 billion. The company currently has a book value, or the total assets of the company minus the total liabilities of the company, of $185.8 billion. The book value of a company is what the company is worth with no multiple attached. This signals that investors on Wall Street believe that the company is not worth half of what is says it is, as healthy businesses usually trades at 2 or 3 times their book value. This represents that Citigroup’s stock is truly worth $63.38 per share, so why is the company not even above $30.00?

News reports are constantly tuned on the finance industry. The industry has become so complex and massive that fraud has become relatively easy for large companies. Balance sheet manipulation was the downfall of the Lehman Brothers, and during the crash of 2008, several other financial firms were caught committing some form of fraud. This has led to an overwhelming lack of trust and confidence in the finance sector. Investors don’t really believe that Citigroup has all of that book value, actually at current prices they believe they don’t even have half of what they are stating. As the finance sector stabilizes and gains back confidence and trust from the public, Citigroup shares should at least rise to their book value.

The chart below displays Citigroup’s book value per share and cash flow per share over the coming years.

Who Is The Market Leader?

Compared to some of Citigroup’s most prominent competitors, such as: Morgan Stanley (NYSE: MS), JPMorgan Chase & Company (NYSE: JPM), Goldman Sachs Group Incorporated (NYSE: GS), and State Street Corporation (NYSE: STT), Citigroup relates moderately in-line.

In terms of growth, Morgan Stanley is the industry leader, while Goldman Sachs is the industry laggard. All companies in the sector pay out dividends, with JP Morgan possessing the largest dividend and State Street possessing the fastest growing dividend. In the fundamental ratio comparison, Citigroup is the bargain in the industry, while Goldman Sachs appears a little pricy. When growth is taken into account, State Street appears a little pricy while Goldman Sachs appears inexpensive. In the net profit margin comparison, Morgan Stanley stands out to the downside, while State Street stands out to the upside.

The Foolish Bottom Line

Anyone that invested in Citigroup before the financial collapse of 2008 knows the evil of the industry. Deception, lying, and fraud have become highly correlated with the financial world, and investors don’t believe Citigroup is honesty valuing its company. This is why the company is trading at less than half of its book value. Citigroup possesses the financial ability to rebound from lows, and should begin to pay out decent sized dividends. Compared to its peers, Citigroup is average. The foolish bottom line is that as the dust settles from the collapse of 2008, and the world regains confidence and trust in the financial world, Citigroup’s stock should have no problem significantly rising, but in no scenario do I see it coming close to their all-time highs in the next decade.       

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