Citigroup: Think Like An Owner

| About: Citigroup Inc. (C)
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The recent rebound leaves Citigroup far off the highs from last year.

The market continues to underestimate the large financial based on the Q2 earnings beat.

Somebody thinking like an owner should snap up the stock trading far below book value and generating huge profits in a tough operating environment.

These days, the market is full of traders that view stocks as a stock symbol versus an ownership position. Traders are too busy predicting the next $0.10 stock move, instead of focusing on the real intent of owning a position in a company.

Source: Citigroup website

Citigroup (NYSE:C) is possibly the best embodiment of the current tragedy of the trading mentality of the stock market. The stock trades off the recent lows, but investors can now own the large financial far below the 2015 highs.

Owners View

Traders and short-term investors are more worried whether analysts are going to raise or lower EPS estimates on a stock and don't really care about the value of a profit-generating company. The issue with Citigroup is that the low interest rate environment is pressuring near-term profits.

As an owner, one is fundamentally focused on the ability to generate profits, period. Sure, the ideal situation is to grow profits on an annualized basis, but the sizable profits eventually build wealth.

One either views the below chart as a horrible company or one producing nearly $10 in profits over the next two years.

C EPS Estimates for Current Fiscal Year Chart

C EPS Estimates for Current Fiscal Year data by YCharts

As well, the Q2 results highlight how the market is too downbeat on the prospects of Citigroup based on the financial crisis. The large bank beat analyst estimates by a whopping $0.14

A prospective owner can buy a position in the company for $0.70 on the dollar with no paperwork or messy negotiations required. Not many business owners would be willing to sell a very profitable company below the tangible value on the books.

C Price to Tangible Book Value Chart

C Price to Tangible Book Value data by YCharts

A shareholder gets the benefit of being able to dump the stock without hiring a lawyer and spending a lengthy time finding a buyer. An owner also gets an increased position in the large financial without lifting a finger as the company completes the constant stock buyback.

In the last quarter, Citigroup bought 30 million shares for $1.35 billion. Every owner saw their ownership position increase by roughly 1% during Q2.


The reason an investor can be confident in the earnings stability is that the large financial is able to reduce costs in order to survive and thrive in the lower for longer rate environment. For the quarter, Citigroup reduced operating expenses by roughly $560 million from last Q2.

Source: Citigroup Q216 presentation

On the flip side, when interest rates eventually rise, the bank can grow the net interest margin that has remained relatively flat over the last few years.

While Citigroup has a relatively low risk situation being insulated as the low interest rates keep the economy growing and higher rates provide interest income upside. Risk nonetheless exists as highlighted by the recent fears over exposure to the energy sector.

The following chart on consumer credit trends shows a scenario that continues to improve. A reversal in these credit trends would increase credit losses and depress earnings. The hope though is that credit trends don't worsen until an increase in net interest margins is able to offset any losses. The risk always exists with financials, regardless.

Source: Citigroup Q216 presentation


The key investor takeaway is that once one thinks like an owner, Citigroup becomes a smart investment. The stock trades at $44.04 while the tangible book value closed Q2 at $63.53. An owner gets a company making roughly $5 per share in a weak operating environment at a big discount.

One can't completely eliminate the risk of owning a stock or a business, but buying Citigroup this far below book value while making a profit is one of the best ways to reduce the downside risk while providing plenty of upside that the financial stock will eventually trade back above book value as banks have historically done.

Disclosure: I am/we are long C.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.