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Summary

  • The stock is inexpensively valued on next year's earnings estimates, but those estimates continue to decrease.
  • The company needs better quality controls to mitigate damage similar to the fraud that happened at Banamex a couple months ago.
  • The company feels a bit too risky right now to keep purchasing batches of the stock.

The last time I wrote about Citigroup Inc. (NYSE:C), I stated, "Due to the reduced earnings estimates for 2015, tiny dividend, and the strong resistance at $48, I'm not going to be pulling the trigger right now." Since writing the article, the stock dropped 0.9% versus the 1.94% gain the S&P 500 (NYSEARCA:SPY) posted. Citi is a global diversified financial services holding company, whose businesses provide consumers, corporations, governments and institutions with a broad range of financial products and services, which include consumer banking and credit, corporate and investment banking, securities brokerage and wealth management.

On April 14, 2014, the company reported first-quarter earnings of $1.30 per share, which beat the consensus of analysts' estimates by fifteen cents. In the past year, the company's stock is down 1.73% excluding dividends (down 1.66% including dividends), and is losing to the S&P 500, which has gained 22.07% in the same time frame. Since initiating my position back on 19Nov13, I'm down 4.34% including reinvested dividends and dollar cost average. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth buying more shares of the company right now for the financial sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 11.12, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 8.72 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $5.41 per share and I'd consider the stock inexpensive until about $81. The 1-year PEG ratio (0.69), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 16.01%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 16.01%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 11.78%. Below is a comparison table of the fundamental metrics for the company when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

04Dec13

52.62

13.25

9.71

5.42

81

0.86

15.40

02Feb14

47.43

10.85

8.25

5.75

86

0.73

14.91

29Mar14

47.24

11.09

8.27

5.71

86

0.59

18.68

30Apr14

48.16

11.36

8.72

5.52

83

0.70

16.25

30May14

47.57

11.22

8.65

5.50

83

0.73

15.29

29Jun14

47.14

11.12

8.72

5.41

81

0.69

16.01

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 0.08% with a payout ratio of 1% of trailing 12-month earnings while sporting return on assets, equity and investment values of 0.9%, 8.5% and 8.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 0.08% yield of this company alone is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

04Dec13

0.08

1

0.8

8.2

8.6

02Feb14

0.08

1

0.9

8.8

7.9

29Mar14

0.08

1

0.9

8.6

8.2

30Apr14

0.08

1

0.9

8.5

8.2

30May14

0.08

1

0.9

8.5

8.2

29Jun14

0.08

1

0.9

8.5

8.2

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 42.83. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars decreasing in height, indicating bearish momentum may continue for some time. As for the stock price itself ($47.14), I expect the 50-day simple moving average (currently $47.64) to act as resistance and $46.32 to act as support. This plays out to be a risk/reward ratio of -1.74% to 1.06%.

Global Fraud Continues

The company, along with a few other banks, is trying to figure out if they've been tricked into fraud in relation to commodities supposedly stored at the Qingdao Port in China. Banks have been issuing loans with collateral, which may or may not be stored at the port. The commodity of choice is copper, where the metal is imported using a letter of credit, stored in a duty-free zone and pledged as collateral for cheap bank loans. The money is then used to speculate on higher interest vehicles. After a few months when the bank calls back that loan, the importer either sells the copper or the speculative vehicle. There appears to be one importer, which may have pledged the same batch of metal for multiple loans. This would obviously be another black eye on the bank after experiencing fraud from afar in the Banamex scandal a couple of months ago. Citi is far too complex for one person to handle at this point in time, and I'd actually like to see the bank break itself up into smaller parts to keep things simpler.

Conclusion

The bank has done relatively nothing for the past four years having only moved up 17% relative to the 82% move the S&P 500 has experienced. The bank has done nothing really to make the stock price move up, keeping the status quo and expecting things to change on its own is similar to Einstein's definition of insanity.

Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates and on growth potential while sporting excellent near- and long-term earnings growth expectations. However, earnings estimates for next year keep decreasing and that is a trend I don't like. Financially, there might as well not be a dividend to speak and the financial metrics are respectable, but not great. On a technical basis, I believe the stock has equal risk/reward ratio. I'm not going to be buying the stock right now because I feel it is just too risky right now, but I'll continue to let what I own ride the tide.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Citigroup Is Just Too Large To Manage