Citigroup Appears Cheaper Than Goldman Sachs, Morgan Stanley

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Includes: C, GS, MS
by: Takeover Analyst

What follows is a list of financials that I have promoted in the past. They have all done absolutely terrific - more than doubling the Dow Jones' return over the same time period. Over the last six months, Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), and Morgan Stanley (NYSE:MS) have soared 48.1%, 45.1% and 28.8%, respectively. Much of the reason why they outperformed was due to dissipating fears over everything financial and better-than-expected macro trends. Going forward, however, I believe that much of the value gap has been closed.

Goldman Sachs

Goldman Sachs trades at a respective 28.5x and 9.5x past and forward earnings with a dividend yield of 1.1%.

Consensus estimates for Goldman Sachs' EPS forecast are that it will grow by 155% to $11.50 in 2012 and then by 16.3% and 10.4% in the following two years. Assuming a multiple of 9.5x and a conservative 2013 EPS of $13.12, the rough intrinsic value of the stock is $124.64 - appropriately addressed by the market. This company is the biggest target for onerous regulations than any player in the financial industry. However, limited exposure to GIIPS for sovereign investment is not being fully recognized by the market. While I do not see the company outperforming broader indexes when the economy is fully outperforming, I believe that downside is limited.

Citigroup

Citigroup trades at a respective 10.5x and 8.1x past and forward earnings with a dividend yield of 0.1%.

Consensus estimates for Citigroup's EPS forecast are that it will grow by 10.6% to $4.08 in 2012 and then by 15.7% and 9.5% more in the following two years. Assuming a multiple of 9x and a conservative 2012 EPS of $4.65, the rough intrinsic value of the stock is $41.85, implying 12% upside. The company is the most attractive of the three highlighted in this report due to its cheap valuation and high beta. These two metrics will enable the firm to generate the highest returns from a full recovery by attracting back formerly risk-averse investors.

Morgan Stanley

Morgan Stanley trades at a respective 16.6x and 8.5x past and forward earnings with a dividend yield of 1%.

Consensus estimates for Morgan Stanley's EPS forecast are that it will grow by 50.8% to $1.90 in 2012, and then by 24.2% and 17.8% in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of $2.31, the rough intrinsic value of the stock is $20.79 - appropriately addressed by the market. The loss of the Japanese joint venture resulted in a weak start to 2011, but the company has gained 300 bps in equities market share. Investment banking share also grew 100 bps, and improvements in the balance sheet will further take the attention off of risk. Risk mitigation efforts and gains in investment banking will secure a strong position in the booming IPO market.

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

Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.