When reviewing the Q4 earnings results of Citigroup (NYSE:C) and general analyst comments, investors need to keep it simple. The market wants investors to focus on returns on average assets or returns on tangible common equity or capital ratios. In reality, one number matters the most unless you think the U.S. is headed into another Great Recession.
The stock is now plunging 6% at mid-day trading following the earnings in part due to the market selloff. At $42, is Citigroup too cheap to pass on?
The one number that matters the most is the tangible book value standing at $60.61. The actual book value per share is higher at $69.46. Investors, though, get to buy the stock at $42.25 today following the big rout in the stock over the last two weeks. At this price, Citigroup needs to rally 43% to reach TBV.
C data by YCharts
The market can be a perplexing valuing system. For a stock trading below book value, one should have very limited requirements to generate value. In the case of Citigroup, the large financial generated $3.4 billion in Q4 profits and returned $1.8 billion to shareholders. In essence, though the market doesn't like the stock, Citigroup is so profitable that it has excess cash to return capital to shareholders. A very odd situation.
A lot of the complaints from the analysts surround one-time items and the group generally sees the results as disappointing though the headlines suggested Citigroup beat numbers with an EPS of $1.06, versus expectations of $1.05.
Remember that for the book value to not matter, the bank has to be under considerable stress. At this point, Citigroup has near zero stress. The bank has only $20 billion of funded loans in the energy sector that is a small faction of the asset base.
The quarterly results took a bigger hit from a reserve build of nearly $600 million. The actual credit losses were less than last Q4 though slightly sequentially higher. Higher reserve builds and credit losses are always a concern.
Source: Citigroup Q4'15 presentation
The key takeaway is that the trading action in Citigroup remains perplexing. The market appears fearful of the improbable repeat of the Great Recession and is missing the fact that financials typically trade at multiples of book value. This sell off provides a great long-term opportunity in an improving financial. The financial system doesn't have the leverage and risks to warrant the current fear to justify this low of a stock value.
Disclosure: I am/we are long C.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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