This Stock Is a Feeble Hold Ahead of Earnings

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

Despite what has been a tumultuous year for Citigroup (NYSE: C), the banking giant has shown that it can still turn things around – remarkably, much quicker than anyone expected. Now, although things seem ok at this point, the company has recently installed a new CEO, Michael Corbat.

This means that changes are on the way -- to what extent, remains to be seen. But until clear directions are shown, investors might want to steer clear of shares that are already at 52-week highs. Then again, should Citigroup produce better than expected numbers as it did in Q3, these shares might find more legs to run.

Better Than Expected Q3

Not much was expected going into the quarter. But Citi managed to beat both top and bottom line estimates. The bank reported adjusted revenues of $19.4 billion. While this represented a 7% drop year-over-year, it arrived 3% better than the $18.7 billion projected by analysts.

Equally impressive, when excluding one-time items, Citi’s adjusted earnings per share rose 26% to $1.06, beating analysts’ consensus of $0.97 per share. On the downside, profitability was a glaring concern – falling 88% to $468 million. This was glaring because the company earned $3.77 billion in the year-ago quarter.

Then again, EPS and revenues were adversely impacted by Citi’s 49% stake in Morgan Stanley Smith Barney, which generated a pre-tax loss of $4.7 billion. And this was no surprise. Of the 49% stake, Citi opted to absorb the damage on 35% of the valuation after announcing intent to sell 14% in that business.

On the whole it was a good quarter. The company regained the confidence of investors by exceeding its Basel III Tier 1 target of 8% by 70 basis points to 8.6%. This is a welcomed indicator of what might result in Q4. Basel III is a global regulatory standard on bank capital adequacy or a recurring stress test.

It serves to prevent “too big to fail” type scenarios by enforcing not only bank capital requirements, but also adding minimum standards on liquidity and leverage. Basel III requires banks to hold 4.5% of common equity. In the third quarter, Citi almost doubled that requirement. Nonetheless, it opted not to revise fiscal year estimates, which was a disappointment.

Expectations for Q4

Average estimates have dropped from $1.04 to 99 cents over the past three months. As a result, during that span fiscal year estimates have also moved down 4% to $3.89 from $4.07. Despite growing pessimism, Citi seems optimistic about its prospects.

Likewise, investors will want to see that Citi is able to find new growth areas. That the bank was only able to produce 1% growth in loans was disappointing. This means Citi is ceding share to rivals such as Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM), which have also lead to shrinking consumer balances -- a trend that Citi must figure out a way to reverse.

On the other hand, that Wells Fargo recently beat on both top and bottom line estimates is also a welcomed sign for Citi. Wells Fargo posted a 24% jump in fourth-quarter profit, helped by better than expected performance in mortgage-banking income and credit. Profits totaled $5.09 billion, up from $4.11 billion year-over-year. Then again, Wells Fargo’s strength may prove to be Citi’s weakness.

Likewise, though Citi is enjoying better than expected increases in new mortgages, Citi is under-performing compared to JPMorgan, which experienced an increase of 8% in that area. JP Morgan is due to report on its Q4 on Wednesday.

Analysts are expecting earnings to arrive at $1.20 per share on revenue of $24.46 billion, which would represent 10% growth year-over-year. While this is not meaningfully higher than Citi’s projections, in what is often a “zero sum” business, how well JPMorgan performs will indicate how Citi’s earnings of perceived – fairly or unfairly.

Bottom line

While there continues to be plenty of optimism with its recovery strategy, investors have become concerned with the uncertainty of new leadership. However, this event should yield very little (if any) concern.

Corbat has been at Citi for almost 30 years. I don’t expect there will be any hiccups. That the stock is trading at a 52-week high -- investors would be wise to wait until after earnings before making their next move.

rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo. 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!

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