Citigroup: Back To Pre-COVID Cheap (NYSE:C)

Summary

Citigroup is back to pre-covid levels above $70.
The large bank stock survived economic shutdowns with substantial profits in 2020.
The bank is set to resume share buybacks at a substantial clip in the second half of 2021.
The stock still trades below TBV and trades below 9x forward EPS estimates.
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Citibank. — Photo by Roman Tiraspolsky/iStock Editorial via Getty Images

Like a lot of financials, Citigroup (NYSE:C) is back close to where the stock traded pre-COVID-19 lockdowns. The large bank sector overcame the economic shutdowns with limited impacts, highlighting these banks aren't the same that were crushed during the financial crisis. My investment thesis remains very bullish on Citigroup as one of the best stocks to own.

No Sweat

At $72, the stock isn't far from the recent highs just above $80 in early 2020. Citigroup survived the virus crisis with limited long-term impact as the company earned an incredible $4.6 billion during Q4 alone.

For 2020, Citigroup reported net income of $11.4 billion. The large bank absorbed nearly $9.8 billion in reserve builds and over $17.5 billion in total credit losses last year and still came out of the year smelling like roses.

Like most banks, Citigroup faced a tough year and the financial results were hardly harmed showing the ultimate strength in the business now. Clearly, the large bank isn't reliant on risky assets in order to drive profitable returns like times in the past.

The bank ended 2020 with a massive $27.8 billion allowance for credit losses. The company only entered the year with $17.9 billion and built the ACL by $4.9 billion in Q1 and $6.0 billion in Q2 without needing to actually write off these loans during the year. With an economy that's expected to boom in 2021, Citigroup will likely end up releasing some of these reserves as the year progresses.

Analysts have raised EPS estimates in the last few months as economic prospects have improved. Analysts now forecast a 2022 EPS of $8.28 for a stock still trading in the low $70s. Citigroup quickly trades below 9x earnings estimates while other banks trade closer to 13x forward EPS estimates. In the case of 2023 EPS estimates, analysts are still using far lower numbers than what was expected at times in early 2020 when the bank was expected to earn up to $11 per share.

Pick Of The Decade Revisited

Prior to the COVID-19 hit, BoA analysts picked Citigroup as the "Pick of the Decade." One of the main arguments in favor of Citigroup was the discount in P/TBV compared to other money center banks.

The large bank stock is still trading slightly below TBV listed at $73.83 at the end of 2020. Citigroup reports Q1 earnings next week and the TBV number could see a boost after rising $1.88 per share last quarter.

Both JPMorgan Chase (JPM) and Bank of America (BAC) trade at around double the P/TBV multiple of Citigroup. Even struggling Wells Fargo (WFC) trades at a nearly 30% premium to their TBV and the multiple of Citigroup.

As the Fed ends temporary restrictions on share buybacks, Citigroup could quickly return to repurchasing 10% of the outstanding shares annually. The stock only has a market cap of $150 billion and already offers shareholders a 2.8% dividend yield while allowed to spend $1.8 billion on share buybacks during Q1 with the Fed restrictions.

Before the pandemic hit, Citigroup had planned spending $21.5 billion annually on capital returns based on the 2019 CCAR plan. The large bank planned to repurchase $17.1 billion worth of shares or the equivalent of ~11.5% of the outstanding shares now. The company might reduce the capital return plans going forward, but investors should expect similar amounts with the Common Equity Tier 1 ratio 180 basis points over the regulatory minimum of 10% and the bank franchise throwing off billions in profits every quarter.

As the company resumes buybacks that reduce share counts by 10% annually, analysts will be forced to hike EPS estimates for 2022 and beyond. Citigroup could reduce the share count by 20% for 2023 providing a dramatic boost to those EPS estimates and significant upside for the stock.

Takeaway

The key investor takeaway is that Citigroup is back to pre-COVID-19 levels, but the stock still has substantial upside from here. The large bank trades below and has a substantial boost to earnings estimates as the company returns to share buybacks that reduce share counts by 10% annually. Investors should've bought the bank stock on weakness throughout all of 2020, but Citigroup can still be bought here.

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This article was written by

Stone Fox Capital

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Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.

Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.

Analyst’s Disclosure: I am/we are long C, WFC. 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.

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