Citigroup: Morgan Stanley's Top Short Idea for 2008

Morgan Stanley is out pitching Citi (NYSE:C) as their top short idea for 2008. Near-term, the announcement of Vikram Pandit as CEO as well as the Fed should be a plus for Citi. But looking to 2008, MSCO sees 3 reasons to be short: earnings are deteriorating, they expect new management to deliver a dividend cut, not a breakup, and they expect further hybrid issuance, diluting current shareholders. The firm does not believe the stock has bottomed out as it is trading above trough multiples: 18% above trough PEs, 24% above trough P/B and 48% above trough P/TB + Reserves.

The firm has lowered their 2008 EPS From $4.01 to $3.55 due to higher losses against loans, CDOs, and SIVs, and due to slower top line growth in the IB and thinner net interest margins given wide LIBOR. They have lowered the forecasted dividend from 54c/quarter to 30c/quarter in 2Q08. MSCO is lowering their price target to $28 based on trough PE levels of 8.0x.

MSCO notes they would be sellers on strength (Fed rate cuts, positive news flow).

Notablecalls: This is a major actionable call! I have been negative on C lately (check recent archives) but when Morgan Stanley pitches it as their Top Short idea for 2008 the stock WILL get hit. Be early and be agressive.

Comments

[Chuck]

and in a tit-for-tat, I suspect that soon Citi will be out pitching Morgan Stanley is as their top short idea for 2008.

[Pj568]

Certainly a lot of gamesmanship here. It would be too risky to actually short (on a long term basis) but I can see Citi's price continuing to fall to a lower level. Have no idea where that level is.

[SHerman McCoy]

The stock was a decent short 20 pts ago when Jimmy Roger's announced it to the world, it's now a takeover candidate. Since when has any short recommendation by Morgan Stanley ever worked out? By the time the wirehouses come up with an idea, it's time to go the other way.

[brij srivastava]

In such situation as Citi is in,any layman would layoff.Morgan Stanley need not pay its analysts to forecast what seems obvious.Short idea is understandable,but what should be the covering up rate?

[Daniel Jacome]

we got out the day it gapped -- roaches come in bunches, this thing needs to almost double to where it was this summer -- we will pass.