A Debate Over Citi

There was an interesting debate about Citibank, Citicorp, Citigroup (C) between Hugh Hendry and Bob Olstein on CNBC yesterday.

Hugh thinks that Citi is going to $10 per share, noting that the financial sector has "endured" a bubble and that when a bubble pops you need time to get better. He cited examples of stocks like Cisco and Microsoft being way below their 2000 highs and that it took Schlumberger 16 years to get back to where it was after peaking in the early 1980s.

Bob thinks Citi is going to $40 in the next 24 months, noting that the stock was at $55 eight years ago. He said there is $4 of "earnings power under the write offs." Olstein said to look at the cash flow and that the stock is down "70 or 80%." Bob closed out saying that eventually free cash flow determines values of companies.

So there are two very different schools of thoughts and both can be correct. We could see $10 and we could also see $40 by April 2010.

I don't think it will go as low at $10 or as high as $40 in two years, but I expect more downside as the bear market goes through its process and I would expect that, generically speaking, there will be a stretch off the true bottom where financials do rocket up. Using Citi as an example but not a prediction, there would be nothing unusual about it bottoming at $15 and doubling in the course of a year.

Yahoo bottomed below $5 in September 2002, and a year later it was above $18 -- almost a quadruple. I don't think a financial with a $100 billion market cap is a candidate to triple or quadruple in a year but a double, coming off meaning event driven bottom seems plausible.

Cisco bottomed around the same time just above $11. A year later it was around $21.

I gravitate closer to Hugh's line of thinking. The way I view it, everything Olstein said about the stock could be true, but that does not have to mean the stock goes up. If as a result of the credit event, if the financial sector stays down and out for four years then the valuation metrics Olstein cites are very unlikely to lift the stock while all the others stay down.

This example is exactly why I prefer a top-down investment style. I find having the wind at your back makes the job much easier than making a case that a stock should go up because it is cheap.

Comments

[raja:]

if Citi were to come out with the truth as to where they exactly stand with regard to the value of their investments, it will go down to 10 within a day or two of such announcement.

They are living on borrowed money from the Fed. Do we know how much they have borrowed?? They are using accounting methodolgy to defer losses, and every trick in the book to make it look not as bad. By the way, since when is borrowing capital good ? especially when it is not for growth, but for survival??

Citi to 10 may be first and more probable than Citi to 40

2008 Apr 11 10:44 AM

[BSCLossMan:]

With all the expert analysis on this site, as well as other sites--and I do mean it--lots of really good experts--no one that I have seen has mentioned what I believe is a very interesting point that I have dreamed up: You can't look at the highs of 2007. They are false highs based on voodoo securities and private equity buyouts. In addition, the earnings power of financials will be a lot lower because that voodoo will no longer be available. Therefore, in my estimation, C, as a $55 dollar stock, was a mirage. Likewise most of the financials. A similar argument, to some degree, could be applied to many non-financial stocks. Was $750 a real price for GOOG, for example? Anyway, I'm no expert, but these are my thoughts.

2008 Apr 11 12:17 PM

[Steven Towns:]

BSCLossMan, there is reluctance to talk about the effects of "voodoo" because of all the guilt by association and participation. The Nasdaq is nowhere near its all-time high. Even worse off is the Nikkei and it has been nearly 20 years!

2008 Apr 11 12:33 PM

[pochovilla:]

IF you believe C is going to $40 in two yrs there a folks with Enron and Lucent stock that wants to sell their shares. Any volunteers to buy?

2008 Apr 11 02:38 PM

[zenalgorithm:]

I'm looking for stocks that will triple or quadruple in 1-2 years after this market bottoms, not double. The only way I'd find C interesting is if it hits $8 or lower. I have a feeling this thing will trade between $12-18 for the next few years - too many foreclosures looming because of the increase in negative equity in homes over the next 3 years.

2008 Apr 11 05:38 PM

[User 156414:]

10! or lower!

2008 Apr 11 09:31 PM

[Chetan:]

An analyst detailed the various kinds of problematic holdings that citi has like LBOs - $43 Billions, SIVs- $40 Billions, commercial paper etc. The total is around $120-140 Billions! The deal with TPG etc for selling $12 B of LBOs is after assuring 20% losses. It means citi may be loosing 30% but giving an impression of loosing 10%. This bleeding isn't going soon!

Can the author explain what's top-down investing he mentions?

2008 Apr 11 11:52 PM

[goatfarmer:]

16 - i'm buying

2008 Apr 12 01:42 AM

[Vegasjoe:]

C will see 15 or less before it sees $40. Remember 1990 at $8, all becasue of the S&L voodoo economics, and poor third world country loans. Olstein was once so sure about Tenet Healthcare at $10-12 a few years back and it now is just hitting $5.50.
We are in the 4th-5th inning of writedowns. More dilution will be coming to C shareholders.

2008 Apr 12 10:37 AM

[Desperate.:]

There's got to be another dividend cut coming this week, which will get more people out of the stock as well.

2008 Apr 12 01:58 PM

[bowlmar:]

There's a lot of stuff not on the balance sheets. How exactly can a company operate like this, and why it it viewed as beneficial?

2008 Apr 12 02:49 PM

[RudyInNY:]

I think Citi has a good chance of going up by 10 bucks rather than going down by 10. Whatever said, quite a good amt of bad news is already factored in the current price. The US recession, credit card defaults, credit meltdown etc are going to hold down the US growth for a while. But Asia, ME are going to be the key in providing the good news for Citi. It may not have material effect on the balance sheet but the good news is going to have a psychological impact on investors and this is going keep investors pushing it back up whenever it goes too low.

2008 Apr 12 08:52 PM