Why Citigroup Will Not Be a Multibagger

| About: Citigroup Inc. (C)
Recently, a financial advisor to one of my relatives recommended Citigroup (NYSE:C) as a long play on the grounds that "Citigroup is undervalued and is worth $35/share." A commenter on Motley Fool's CAPS has also noted this, stating that "an analyst on Nightly Business Report declared that Citigroup common stock would be at $30/share or more within five years." I have heard second hand that many other investors in this company expect a similar stock price for Citigroup within the next few years.
The very notion of Citigroup selling for prices like the above is patently absurd, and it is irresponsible for analysts and advisors to suggest such a thing.
I suspect that many investors and analysts see something similar to the chart below when evaluating Citigroup:
[Click all to enlarge]
Source: Fidelity Investments
I suppose that someone casually observing this chart could make the case for Citigroup at prices significantly higher than they are today. After all, the stock did trade for $30 and more only a few short years ago.
What the people making the case for several hundred percent returns on Citigroup are missing, however, is the massive amount of dilution that has occurred with this stock since the beginning of the Great Recession. At the end of Q2 2009, Citigroup had 5,507.7 million shares of stock outstanding -- but by the end of Q4 2010, that number of shares outstanding had ballooned to 29,058.4 million. That is more than 29 billion shares.
At the current market price of $4.82, Citigroup has a market cap of $140 billion. That is comparable to J.P. Morgan (NYSE:JPM) at $175 billion, Bank of America (NYSE:BAC) at $137 billion and Wells Fargo (NYSE:WFC) at $172 billion.
The valuation of Citigroup is currently right in line with that of the other large banks. At a share price of $35, as the one advisor suggested in the opening paragraph, Citigroup would have a market cap of $1,017 billion. That would make Citigroup bigger than Apple (NASDAQ:AAPL), ExxonMobil (NYSE:XOM), and Wal-Mart (NYSE:WMT) combined (They have market caps of $314.25 billion, $396.75 billion, and $203.96 billion, respectively). Clearly, Citigroup at $35 is utterly ridiculous. But what about a lesser valuation, say $20/share – which would still represent a 400% return from the current market price?
The table below shows the market cap for Citigroup at several different stock prices:
As this table clearly illustrates, even a $7 price would make Citigroup larger than J.P. Morgan -- although JPM has been a much more solid company through the Great Recession, and has more assets and stockholders' equity on its balance sheet than Citigroup (both have roughly the same Leverage Ratio). Presumably an economic recovery would lift up both companies, but I cannot imagine anything that would push Citigroup over $10/share at the very high end. Most likely, it will never hit that price.
Disclosure: I am long C, WFC.