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Nonchalant Investor
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MBA in Finance, MA. Counseling Psychology, and an Active Buy side Analyst for a minor Fund.
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  • Citi's 20% Potential Growth For 2013

    Citigroup Inc. (NYSE:C) is broken down into two major business segments: Citi Corp and Citi Holdings. Citi operates in four main regions, North America, EMEA (Europe, Middle East and Africa), Latin America and Asia. Citicorp represents the Global Consumer Banking and Institutional Clients Group, while Citi Holdings is comprised of the Brokerage and Asset Management, Local Consumer Lending and Special Asset Pool. Citi Holdings represents 8% of the balance sheet and has been a laggard for Citi, as it only contributes 5% of the earnings. They have been slowly unraveling the loosing assets that are under Citi Holdings to allow for accelerating income and returns.

    As for the financial sector it is seeing higher interest rates, though most of their earnings calls have warned about compressing spreads. We have seen increasing mortgage growth across the North America regions, and deposit growth worldwide. As employment in the United States has picked up we see delinquency rates across all loans diminishing. Emerging markets that are experiencing growth are seeing higher levels of debt growth as past conservative generations fade and younger generations experience explosive growth.

    As earnings have been reported, many money center banks have missed on the top line numbers, while their bottom lines have been meeting or exceeding expectations. Citi missed both top and bottom line, but luckily for Citi they did experience increasing NIM's which was a contradiction from the majority of money center banks. Their miss on top and bottom line may have largely been caused by the restructuring from the previous CEO's strategy; furthermore, along with their billion dollar restructuring they incurred higher than normal litigation costs and thus have stashed more money into their reserves as a hedge for future litigation. But I think this was because the CEO, Mr. Corbat, wanted to keep expectations of their future earnings low, until they could produce better returns.

    Citi's new CEO, Michael Corbat, outlined a new strategy as he entered his role, back in 2012. Mr. Corbat laid out his three stage plan: focusing on bettering their core banking businesses, optimizing and improving efficiency, lastly reducing Citi Holdings. Based on their expansive commercial and institutional loans and deposits, Citi will be leveraging their position in the fastest growing markets; Latin America and EMEA (Specifically Mexico and Europe). In the past we saw branch openings increase in Latin America, which they have yet to penetrate certain markets (Chile and Bolivia). In Europe they have yet to get into smaller markets, but they are pretty well developed in the region, and may have to look to strengthening their relationships in the region. When it comes to improving their efficiency, Citi's expansive exposure to 160 countries and jurisdictions, has overly exposed them to costly operations. The initial portion of their efficiency strategy began with slashing jobs, 4,000 in 2011 and 11,000 in 2012. The efficiency strategy was further enhanced by placing operations and technology under the Global Consumer Banking segment to leverage their back office operation and enhance their performance. The final stage of the strategy is the continual reduction of Citi Holdings because of the continual drag on income and returns.

    As for the future, many banks like Citi expect the US economic environment to remain optimistic, continuing loan growth and deposits, and as said before. The compressing credit spreads could still be a mainstay in case yields and rates don't go up. Citi announced in their earning call guidance, that they expect the same rate of release of reserves as last year for their credit cards, though they expect to hold more for their litigation expenses. Citi also expects to gain of $900mn in savings in 2013, which has been planned via their 2013 budget. Their lower revenue generating division, Citi Holdings, will see a continual unwinding of their assets though not at the $10 billion pace it was for the last couple of years, as market data shows a resurgence in this divisions' non performing assets. The restructuring of Citi should open up opportunities for them to outperform in the future as rollout their new strategy bringing them cost savings and revenue growth.

    Citi has a lot to offer as a restructure play being that it touches many emerging markets and is exposed to many growth markets. In the current financial environment we can see it taking advantage of these growth markets. Their current strategy has yet to fully play out as they stated they believe that the streamlining process will take several quarters. Their focus on certain markets will further develop as they hone in on fast growing markets and how to enhance their exposure to these areas, which will in-turn increase top line numbers. The inefficiencies of operations at Citi that Mr. Corbat intends to correct, by following the 2013 budget and continuing cost cutting measures, will lower costs and raise bottom line numbers. I believe that with this new strategy coupled with a strong management team will result in positive EPS growth for Citi in the coming quarters.

    Since most of the money center banks have been retracing their valuations back to tangible book it seems fully plausible that Citi will follow this trend. Taking in consideration its tangible book at 54.29 we could very possibly see a 20% increase from its current trading price by the end of the year.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 19 2:40 PM | Link | Comment!
  • DFS: Discover Financial Services Faces Short Term Pull Back

    Very few companies can boast that they have outperformed the largest firm by market cap within the last 5 years, and many of them have been small enough for the lemonade stand operators to buy a few hundred shares. The stock I am referring to is Discover (NYSE:DFS). I will have to explain in brief why this has such a bull case.

    Discover is a mid-sized multi service financial institution that is a cross between a bank and payment processor since it has a banking and a payment service segment. Its main revenue source comes from the outstanding balance interest charges on the credit cards that they issue. This shelters them from decreased swipe fee costs. In the last year, the outstanding credit balance on customer credit cards increased 3.3%. Discover had came from an average net charge off of 7.44% in 2010 to 3.99% in 2011 and a continuing decreasing trend towards 2.4% for 2012. Meaning, less unpaid credit card balances are having to be written off as potentially never being paid, and more people are paying off their debt, increasing capital inflows, possibly from the improvements in the labor markets. This is a cost savings for Discover as they need to have less money depreciated from their accounts, saving Discover money on their loan provisions.

    Discover's Management has also made good decision, acquiring select companies, that could easily be absorbed by the company and create profit inflows. Included in these acquisitions was the purchase of a Student loan originator for $600 million, with a portfolio with an aggregate principal of $7 billion. This acquisition has been a boon for the company given the segment has recently grown to over $10 billion since 2010. The risk pertaining to the student loan segment, consists with the fact that with the current administrations re-election, it is more likely that possible student loan legislature could be added or amended, similar to how they did so earlier this year, making the federal government the sole servicer of Federal student loans. Discover's most recent acquisition is that of a Mortgage servicer for $56 million, allowing them to become loan originators at a time when the housing market is in a recovery. We will have to see how this pans out.

    Discover's other portion of the Banking segment includes deposits which consist of online savings accounts and certificates of deposit, which have grown substantially, from $39 billion in Q4 2011 to $41 billion in the 3rd Quarter of 2012. The positive sign of continual capital inflows and reinvestment rates staying high, are juxstaposed to the fact that the re-investments are going from longer term CD's to shorter term, 1 to 3 year CD's.

    Discover also owns three proprietary networks, Discover Network, Pulse, and Diners Club international. Discover Network operates mainly in North America processing, Discover branded credit card transactions. Pulse operates 800,000 ATM's and other Point of Sales terminals, where debit cards may be used, again in North America. Diners Club International operates in 185 countries, it also gives perks for corporate and professionals. These networks gain their revenues from transaction fees, discounting the transactions by a certain percentage per transaction. This is a nominal part of the revenues so a minor reduction in transaction numbers would not greatly affect Discover's revenues. Their recent partnership with PayPal should boost their transaction numbers, as PayPal begins to issue Discover branded credit cards to potentially 115 million person user base. Keep in mind that this could also increase their credit card balances that they get interest income.

    After trading down from fresh 52 week highs, the technical's show that we can expect a pull back, given this stock has climbed from $5 to $41 in 3 and a half years. The MACD indicator has been creating a small negative divergence on the daily's, as seen by the chart below. I had expected a short, but strong pull back, which came the last two trading sessions and as I type this, the stock has fallenfrom $41.49 to $38.30.

    click to enlarge)Yahoo Finance

    Its last close puts it below the lower Bollinger band, and far below its 20 day MA, showing that perhaps now may be a good spot for an entry, as it could be oversold. A recommendation would be buying it as it retraces back below $37.60 and probably settles near $36.89.

    click to enlarge)

    As the macro issues in the Unites States become resolved, mainly the Fiscal Cliff, I believe we will see a rush back into this growth stock, seeing gains once again. I expect a strong earnings release and market share growth as PayPal moves them into the potential hands of 115 million users.

    There are foreseeable risks involved with this trade, the potential for further regulations on student loans and mortgage originations. Taxes are a large part of the fiscal discussion and increases in these may have an adverse affect on Discover's CD investment. Lastly, if the fiscal cliff is not resolved, or enough of the main points aren't corrected, we could see unemployment rise again, causing the net charge off rates to increase and a losses due to loan provisions.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DFS over the next 72 hours.

    Nov 16 12:53 AM | Link | Comment!
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