What Is Citi Stock Worth?

I was thinking about how should one value Citi (C). Its peak EPS in 2006 was $4.24. I think it will be another 5 years before it returns to that EPS level, because (a) The company has diluted by about 10%, so peak EPS on today's share count is more like $3.80, (b) leverage in SSB is going down for sure - I think its earnings are impaired for at least half a decade, and (c) there is a recession/slowdown in the US. So some impact on banks is bound to occur.

So let's assume Citi hits $4.24 in 2012. At 11x PE, I will value it at $46.80 in 2012.

Assuming a 12% discount rate (why will I invest in a financial today if I don't double my money in 4 years, so 12% discount rate + 5% dividend = 17% effective return over 4 years = double money), I will value Citi today at $29.74.

Disclosure: No positions

Comments

[Voice of Re...:]

Too many things effect a stock's price, often things that have little to do with how well or poorly the company is actually doing. Way too many analysts, and people on Seeking Alpha that like to mimic them get carried away with trying to play various number games.

How much is any stock REALLY worth? Whatever at the moment someone is willing to bid for it. That's what it is worth.

2008 Apr 20 05:00 PM

[LarryM:]

It's one thing to make the assumptions you made, it's another to show how you derived your conclusion. Please show your math in the future.

$4.24 in earnings in 2012 x 11 P/E = $46.64 Future Price

Est. Growth rate (r) = 12%; Estimated Future Value (f) = $46.64, Years (n) =4; Present Value = $29.64.

In addition, if you assume a 10% growth rate in the dividend, which may not be possible given Citi's current circumstances: Est. growth rate = 10%, current value of dividend 0.32 x 4 = $1.28 (pmt), and 4 years (n), you get a present value of the dividend of $4.06.

Added to the current price of the stock and you get a total value for Citi of $33.70.

I agree with the last comment, too many assumptions.

2008 Apr 20 05:04 PM

[Voice of Re...:]

I'm overweighted on the financial sector BECAUSE it has been beated down so hard. I even have positions in what some would call "dogs". Is that a gamble? Damn right it is. For those that didn't know, playing the stock market, the biggest game on the planet is a gamble. Always was and always will be. Some forget that. Others never learn.

Frankly I've had a belly full of the "what if" crowd and their always negative outlook and constant over caculating. If you don't have the stomach to take a position when a sector is out of favor you'll never make any money. Not serious money. For those that want to play it safe buy a FDIC insured CD and grap at fat 1.5% or whatever they're paying these days. <snicker>

2008 Apr 20 05:12 PM

[arizonamikes:]

In an artical by, Seeking Alpha, yesterday, I asked the quetion,"What is the value of C based on it's present PE of 33-35. Today we get a responce. I would'nt call it the right responce.

Meridth Whitney has a proven track record. With-in the last month Meridth has stated the value of Citi (C) to be $10.00 a share, Bank Of America (BAC) to be valued at $17.00 a share. How do you figure she came to these conlusions? Who's right the author of this artical or Whitney? Since it seems that there are so many stock market cheerleaders these days, especially in the are of financial stocks, we always have to ask, "what is the motive of the cheerleaders." I recall Lehmans statements about C in the last few days. What Lehman is really doing is trying to support their own industry. According to one reporter, 'you shouldn't expect industry or CEO's to come out and say negitive things about their business. They want you to buy their STOCKS.' And that's what these guys r, is "pitch men."
We don't know what C or BAC will be worth in the future. Many people thought they new Bear Sterns was going to be worth something. Bear's CEO told us evry thing was great just 2 weeks before it crashed.
We are in a "fix" here in American. The general popultation has been relagated to low paying mealingless jobs. We have been keeping our heads above water with ARMS for our homes, even 2nd homes, credit for cars, credit for gasoline, and now even paying for our food with credit. All this is coming down around our ears. And the banks will feel this along with the mortgage companies.
How can our country continue succesfully with out jobs that take our natural reasources and put them together to make a products. This is the basis of a country, and has been since the beginning. As long as we give jobs to China our country will continue to sink.

2008 Apr 20 06:32 PM

[arizonamikes:]

Correction to my comment above: What I meant to ask was why is Citi Banks PE so high, it's around 33 before Fridays earnings report. The industries PE is around 10 as I understand it. If the stock was at around $24.00 before the report on Fri. and the PE was 33 you could cut the price in half, to $12.00 and the PE would still be too high, 16.5.
The author assumes much. On the subject of the dividends it is possible the dividend will be cut if not eliminated completely.

2008 Apr 20 07:15 PM

[Dan Schmeidler:]

C trades at a high PE because future financials (specifically income statements) will not reflect huge write-offs similar to the ones in the past few quarters. Even though the write-offs stem from balance sheet items, they needed to run through the income statement as an expense. That is because companies are not allowed to, let's say, capitalize expenses such as the write-offs. Similarly, when a company profits from the sale of an investment, it needs to run the profits through the income statement, whereas it would probably prefer to capitialize the gain on their balance sheet and depreciate it over time. Certain items, or transactions, can be capitalized on the balance sheet, but the accounting "world" has really tried to clamp down on it to provide clarity for the readers of the financil statements. For example, look at JNY, a profitable Retail company, currently trading at around P/E 4, (industry average is easily double that), because of their (very) profitable sale of Barney's New York to the Saudis.

2008 Apr 20 09:11 PM

[Voice of Re...:]

"Meridth Whitney has a proven track record" Indeed she does. She's dead wrong about half the time like all the other analysts.

2008 Apr 20 11:34 PM

[LookCloser:]

News on ft.com says that a union is calling for the breakup of Citi. This does not happen unless there is doubt about a company's survival. Citi has already starting liquidating this week with sales to Wells Fargo and GE. The terms have not been released yet so that the "cheerleaders" could talk the stock up before it goes back down. Thanks to arizonamikes for reminding us of the Bear Stearns situation so we don't get stuck in this stock before we are certain that this company will survive.

2008 Apr 21 12:23 AM

[fxtrader07:]

C is unlikely to return to previous levels of EPS anytime soon. Deleveraging takes a lot of time and does a lot of collateral damage along the way. auto loans and credit cards are big shoes yet to drop - the end to write downs is not near. Mer, GS, C - all tell us otherwise, of course. But what else should one expect?
A lot of asset-backed business will vanish and never come back because it wasn't viable in the first place. the earnings from 2004-2006 were highly inflated by unsustainable business that now starts to unravel. And make no mistake: while revenues will be subdued, costs will escalate. many more risk managers, a lot of additional staff needed to deal with the myriads of foreclosures and bad loans will drive costs up. Think of past earnings as being to a considerable extent up-front-payments for contracts he costs of which will only now start showing up. how about 20 years till citi reaches the bubble-peak earnings again (if they ever will at all)? THAT changes the equation enormously, not?
C is a value trap that many a great value managers fell into.
Stya away from banks. they do not even trust each other for one night. (look just at the interbank market) Why should we trust them?

2008 Apr 21 06:53 AM

[vaduz:]

fxtrader07 has got it right, i think

2008 Apr 21 07:18 AM

[sumosama:]

Take heart! Good effort on the valuation! I agree it is undervalued and am buying for the long term on dips.

2008 Apr 21 02:07 PM

[BookValue:]

C will be writing up the value of the assets that it just finished writing down. Check out the ABX index for subprime and LCDX index for leveraged loans. Both are up in value since C closed the books on March 31.

People fear C won't be able to return to its peak earnings power, but a company that has a long history of high teens/low twenties returns on equity will inevitably get back to those levels of profitability. It won't happen immediately, but within a couple of years, the RoE will be 18-20%.

Companies with that level of profitability will trade at 2x book value, just as C has historically. With $21 of book value currently, $42 is a good one year price target. Within 2-3 years, C will be at $50.

2008 Apr 21 02:07 PM

[nonsumdignus:]

"Check out the ABX index for subprime and LCDX index for leveraged loans. Both are up in value since C closed the books on March 31.
"

They are up only by a small fraction 6-7% in only a single tranch (topmost quality credit). All other tranches are following their trendlines - straight to 0. The tranche that is slightly up should resume its normal course in the same direction as the others.

Bulls are those on the slope of hope, it seems.

www.markit.com/informa...

2008 Apr 21 04:54 PM

[LoveShorting:]

Too many words .... recession will deepen ... I'm short C and loving it.
Foreclosures still rising. Credit card defaults next wave. These guys were nearly as irresponsible and greedy as BSC ... my target $12.

2008 Apr 21 04:59 PM

[BookValue:]

To nonsumdignus:

Pretty much all C has left in terms of subprime exposure is in the highest tranches, and most of those are in the older vintages which have superior credit metrics and default performance. That is why as risk appetite is returning to the market these tranches are going up in value. The highest tranches need a foreclosure rate of 40% and a severity rate (loss on sale in foreclosure) of 50% before their values are significantly impaired. None of the older vintages are coming anywhere close to these numbers, so they are returning to par.

Leveraged loans are also returning to par, which means C is more likely to have to mark up rather than mark down in the coming months.

I would be cautious on the short side here because the macro story on C has already played itself out. As risk appetite returns to the market, C will no longer be a momentum/sentiment trade and will return to a fundamental valuation. Since the last recession, C has traded within 2-3% of 2x end of year book value.

Year Avg. Stock Price 2x End of Year Book
2007 $46 $43(diluted)
2006 $47 $48
2005 $43 $43
2004 $42 $42
2003 $36 $37
2002 $32 $33

Bloomberg estimates show a forecast end of 2008 book value of $23. Going from 1x P/B to 2x P/B gives significant potential return.

2008 Apr 21 07:18 PM

[dkp:]

Pls remember two things from the latest qoarterly results,(1) write-offs of $ 12 billions cover the entire spectrum of citi's business, not just subprime book;(2) the revenue was down 50%.

So the questions about the future price are (1) how will economic slowdown affect the future revenue?,(2)Where will citi find the sources of increased earning with a declining asset base?

2008 Apr 21 10:01 PM

[Gaurav:]

No one can consider everything and calculate the exact EPS of Citi in 2012. I dont know how low home prices fall or how high oil rises. What I am betting on is that with a little wider spread, a little bit of inflation, international growth offset by equity dilution, Citi hits the same EPS as 5 years ago. My guess is that in the 1990's, the survivors of the housing bust took lesser time to regain their peak EPS. Citi won't go bust because it has access to capital and access to liquidity. It makes money each qtr on its new business which from now will keep covering the write-downs for next 2 years.

LarryM you are right, my maths was wrong.

2008 Apr 26 10:52 PM