Financial services titan Citigroup Inc. (C), one of Wall Street's "storied" companies, has taken shareholders on a wild ride this year. Hitting $30 levels in January and moving to near-$40 in March, shares closed this week just above $26. Here's why I'm bullish on Citigroup.
From a fundamentals perspective, Citigroup is in a fantastic position. With a market capitalization of $87.8 billion, annual dividend yield of 0.15%, and net income growth of 20% over the last 12 months and a 3-year net income CAGR of over 36%, this diversified financial services holding company and its two main segments - Citicop and Citi Holdings - are in great shape.
Earnings per share have grown 15.2% over the last year, while the EPS 3-year CAGR is near 30%. Net operating cash flow from this quarter last year has increased by 429% to near $5.5 billion. This is outstanding, especially when we consider that the industry average cash flow growth rate was 207% over the same period.
Chairman O'Neill, CEO Pandit, and the Board have exercised balanced financial judgment to guide the firm in the aftermath of the financial crisis. In the words of Credit Suisse analysts, "the restructuring of Citigroup's businesses and delineation between Citicorp and Citi Holdings has allowed management to realign its strategy and dispose of underperforming assets and/or businesses."
A greater emphasis on talent acquisition, efficiency in operations, and overall expense minimization has led to recent successes and outstanding quarters. One thing management can improve on is its debt management; debt to equity ratio for Citigroup (3.71) is much higher than the industry average in financial services mega-banks and this could certainly be reduced.
Critics may cite the continued declines in the American housing market, the negative repercussions of the firm's behavior during the 2008 financial crisis, risky lending and loan origination, slow emerging markets growth, and more as arguments in favor of a bearish thesis on Citigroup - and for good reason; investors should keep all of these in mind when conducting their own due diligence on this equity.
Still, when compared to peers such as JPMorgan Chase & Co. (JPM), SunTrust Banks, Inc. (STI), and Goldman Sachs (GS), Wells Fargo & Company (WFC), PNC Financial Services (PNC), Citigroup is in a very stable position. Recent events have only confirmed this, with incredible growth in Asia and India in particular, FTC approval on a deal with Sony (SME), and more.
However, for investors looking to conduct their own due diligence, peers such as Bank of America (BAC), Moody's (MCO), Leucadia National Corp. (LUK), Manhattan Bridge Capital (LOAN), ING Groep N.V. (ING), Resource America (REXI), Microfinancial Inc (MFI), Life Partners Holdings (LPHI), California First National Bancorp (CFNB), and others throughout the diversified financial services sector may be worth examining.
Pick up shares of Citigroup this week, and take advantage of the confluence of events driving the markets lower in recent days. I expect equity shares of this company to be trading near $40 at this time next year. More cautious investors may desire to explore various short- and longer-term options strategies to capture the return potential of this equity with less risk (after all, Citigroup's beta is 2.6). If you go down this road, keep in mind that volatility will be priced into the contract prices of these derivative securities as well. Either way you want to play it, there may not be another chance to buy Citigroup at these levels for months to come.
Disclosure: I am long BAC.
Additional disclosure: I may initiate a long position in C over the next 72 hours.