Citigroup: More Proof Of Bargain Basement Value

| About: Citigroup Inc. (C)


Citigroup again beat quarterly estimates despite a tough banking environment.

The market should start building confidence in the bank while the stock buyback plan provides downside support.

Investors should continue using the opportunity to own a solid bank far below tangible book value.

Before the open on Friday, Citigroup (NYSE:C) reported another quarter of not only beating analyst estimates, but also smashing the negative sentiment on the stock. The quarterly results weren't all that impressive compared to previous periods, but the investment thesis remains that consistently positive results are good enough for this bank stock.

On the back of the news, Citigroup is still trading below the strong resistance around $54 despite constant growth in the crucial tangible book value metric and large capital returns. The question now is whether the stock finally breaks out or provides investors another opportunity to buy the dip.

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As with most of the large financials, the quarterly results were better than expected but down from the prior periods. Pressure on net interest margins and slightly higher credit costs, partially due to the Costco (NASDAQ:COST) deal this quarter, are hurting a generally decent loan environment.

This infographic from AlphaStreet provides a great summary of the Q3 financial results.

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What the market will probably miss from looking at these big picture numbers above is that the core Citicorp revenues were actually up 1% sequentially. At the same time, actual net credit losses were down, but Citigroup recorded a reserve build of $176 million versus the $256 million release in the prior quarter. The $432 million increase in this cost area more than accounted for all of the income declines.

Despite yet another quarter of large scale profits and the ability to again handle a difficult banking environment, Citigroup still trades at roughly 9x forward EPS estimates and far below book value.

The market will focus on some of the misleading metrics like return on average common equity and such. The reality is that Citigroup has a large deferred tax asset that in part skews this metric. So while Wells Fargo (NYSE:WFC) reported a return of 11.6%, Citigroup only produced a 6.8% return in this quarter.

The market doesn't want to hear it, but Citigroup continues to provide tons of support for shareholders by repurchasing shares, with the stock trading far below book value. For Q3 alone, the bank bought 56 million shares and returned a total of $3 billion to shareholders including the small dividend. A big benefit to shareholders when the price to tangible book value is far below 1.0.

C Price to Tangible Book Value Chart

C Price to Tangible Book Value data by YCharts

The key investor takeaway is that the quarterly results were again solid considering the banking environment. Citigroup continues to produce huge value for shareholders whether or not earnings are growing. The expectation though is that in combination with higher interest rates, the Costco business, and share buybacks will actually lead to growing earnings in 2017 and beyond.

Growth metrics are misleading while the bank reduces Citi Holdings business. The real key is to not overly sweat the small details while the stock is an ultimate bargain below $50.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.