Citigroup And Bank Of America: 2 Undervalued Financials

|
Includes: BAC, C
by: CRG Research

In this article, I take a look at Citigroup (NYSE:C) and Bank of America (NYSE:BAC), two financial services companies that may offer investors upside potential that outweighs the risks. We'll use the management effectiveness ratios, book value-share, price-sales, price-book value, etc., to evaluate Citigroup and Bank of America.

Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.

European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain. Diversified investors are compensated for bearing systemic risks.

Rating System

Buy - Be long

Neutral - No Position

Sell - Be short

(The ratings, research and analysis in this article should be considered as starting point for further research.)

Bank of America - Buy

  • Return on Assets (TTM): 0 v. 0.56

  • Return on Investment (TTM): -- v. 0

  • Return on Equity (TTM): -0.61 v. 8.47

(Management effectiveness ratios courtesy of Thompson Reuters)

Bank of America's share price has declined substantially from its 2011 & 2012 highs. Additionally, revenue-share and book value-share are declining. Typically, financials are early cycle leaders. That being said, given the decline in the "market" and the current valuation, I'm bullish on common equity shares of Bank of America.

With regard to the capital buffer, Bank of America has a 10.8% tier-one capital ratio, according to the financial statements released in April 2012. That means the firm is leveraged roughly 9-to-1. I consider, the leverage ratio to be too high-- although the financial regulators consider the leverage ratio to be appropriate.

According to the firm's financial statements, tangible book value-share is $12.87. What that says is, the firm is trading at roughly a 45% discount to tangible book value. In other words, the market isn't thrilled with the growth prospects of the institution. I think the market's perception isn't correct, and Bank of America will find ways to grow revenue and earnings.

Shares of Bank of America are trading below the declining 50-day simple moving average. The trend is down. However, common equity shares are trading near a key support level and may bounce.

Book value-share is declining; the decline is considered bearish.

Share price is declining; the decline may be limited as valuations may be near a bottom.

Price-sales is declining; should the valuation metric begin to rise, Bank of America could double in value based on price-sales.

Price-book value is declining; the valuation metric may be near a bottom.

Citigroup - Buy

  • Return on Assets (TTM): 0.57 v. 0.56

  • Return on Investment (TTM): -- v. 0

  • Return on Equity (TTM): 6.08 v. 8.47

(Management effectiveness ratios courtesy of Thompson Reuters)

Citigroup's common equity share price has declined substantially from its 2011 & 2012 highs. Additionally, book value/share is increasing; although, management is ineffective based on the management effectiveness ratios. Typically, financials are early cycle leaders. That being said, given the decline in the "market" and the current valuation, I'm bullish on common equity shares of Citigroup.

Citigroup has a tier one capital ratio of 12.4%, according to the financial statements released in April 2012. That means the firm is leveraged roughly 8-to-1. I consider, Citigroup's leverage ratio to be too high- although the financial regulators consider it to be appropriate.

According to the firm's financial statements, tangible book value/share is $50.90. What that says is, the firm is trading at a 50% discount to tangible book value. In other words, the market isn't thrilled with the growth prospects of the institution. I think the market's perception isn't correct and Citigroup will find ways to grow revenue and earnings.

Shares of Citigroup are trading below the declining 50-day simple moving average. The trend is down. However, common equity shares are trading near a key support level and may bounce.

Book value-share is increasing; the increase is considered bullish.

The common equity share price of Citigroup declined to the 2011 support zone.

Price/sales has been declining; the valuation metric may be near a bottom.

Price-book value is declining and may be near a bottom.

Macro Environment

ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.

The pace of job growth has slowed in recent months and may stabilize at low levels.

CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.

European Union services PMI is declining and should increase in the coming months.

European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.

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

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.