- Citigroup was already the cheapest TBTF bank before yesterday's CCAR announcement.
- Today's selloff gives investors an opportunity to own Citi at 16% below tangible book value.
- Citi is now trading at only 8.5 times next year's earnings.
- Earnings prospects haven't changed from the announcement.
Citigroup (NYSE:C) shares are getting hammered in the pre-market this morning after the Fed rejected the bank's capital return plan. As part of the now-annual CCAR program, Citi had asked to be able to return $6.4 billion in common stock repurchases and increase its meaningless dividend to a less-meaningless level of 5 cents per share from the current penny per quarter. While I think it's obvious that market participants are shocked, as evidenced by the selloff in shares, we must assess this new information in the context of long-term investing. When we do this, I think Citi represents a compelling value today, even more so than it did yesterday before the results were released.
To begin, any kind of knee-jerk reaction to a piece of news that erases nearly $8 billion of market cap from a stock should be further examined. While I was as shocked as anyone that the Fed just said 'no' to Citi's capital return plan, pummeling the stock is probably not the best move at this point. What changed in Citi's business model or prospects last night? What made it so that Citi is worth 5% less today than it was yesterday? What is the long-term impairment on the value of Citi shares this morning? The answer to all of those questions is 'nothing' and as a result, I think long-term investors can take advantage of what I consider to be a nonsensical selloff.
In order to quantify the value of the opportunity being presented, we'll take a quick look at a couple of metrics for Citi. First, Citi is trading for ~8.5 times next year's earnings estimate, making it ridiculously cheap by any measure. That kind of earnings multiple is usually reserved for stagnant or dying businesses, neither of which accurately portray Citi. JPMorgan (NYSE:JPM) trades at 9.5 next year's earnings, Wells Fargo (NYSE:WFC) is at 11.4 and Bank of America (NYSE:BAC) is a 10.6. In other words, even throwing out market multiples Citi is cheap compared to its closest competitors in terms of earnings. Not only is it cheap, but by a pretty wide margin as well.
Next, and most important in my view, Citi's tangible book value, which it was already trading below prior to yesterday's news, was sitting at $55.31 at the end of December. Consider that for a moment; all of Citi's competitors are trading above their tangible book values and in some cases, far above. However, Citi languishes below tangible book value and today, is even further below. With shares trading at $47.64 in the pre-market as of this writing, Citi is trading a whopping 16% below tangible book value. That is an enormous margin of safety in my view because Citi is still making billions each year and that tangible book value number will continue to improve. And keep in mind, we aren't even talking about the standard book value measurement, over which some large banks trade as well. Citi's book value is $65.23 as of the end of December, a full 37% higher from today's prices. But first things first, I think Citi will trade at tangible book within 2014 on strong operating results and the market moving past this setback from the CCAR.
The bottom line is that Citi now represents a value too compelling to ignore. Before the CCAR, Citi was already the only remaining too-big-too-fail bank trading below its tangible book value, with Bank of America having crossed that threshold in 2013, and now it's even cheaper. I'm calling for Citi to trade at its tangible book value within 2014, representing at least 16% upside. And keep in mind, even if I'm right, Citi will still be the cheapest TBTF bank out there in terms of tangible book value after a 16% rally. Today's selloff represents a great opportunity to get into Citi at lower prices than seem rational at this point. If you are a long-term holder, you live for selloffs like this one.