Citi: "An Irresistible Opportunity"
01/21/2005 12:00 am EST
"I see a Dow of 12,000 by the end of 2005," says John Dessauer in his annual forecast issue. "As such, our best strategy is to buy our favorite stocks when they come down in price." One such favorite is Citigroup, which he considers an "irresistible opportunity".
"Citigroup (C NYSE) is an old friend to our newsletter, and my personal employer in the 1970s. We owned the stock from 1980 to 2000, multiplying our money many times over. Since then, this giant global financial services company has evolved into a cash machine. Citi earns roughly $20 billion a year. The stock finished 2003 at $48.62, rose to more than $50 a few times early last year and then languished in a very narrow trading range. But earnings per share are up 18%, to $4.05 in 2004. Meanwhile, Wall Street has modest expectations for Citigroup. Estimates for this year are a gain of 11% to $4.50 a share.
"Why are expectations lower this year? The first reason is size. Wall Street analysts say that it will be tough to keep double-digit growth going when you start at the $20 billion level. If Citigroup were a purely domestic US company, then I would agree. But Citigroup serves the global economy, where there still are enormous opportunities. Then there is China. In 2007, when China’s banking system opens to full competition, Citigroup will be ready! Citi already has a presence in China and is becoming a familiar name to Chinese, and to companies doing business in China. I believe that China alone is a huge long-term opportunity for Citigroup.
"Now is the time you can buy Citigroup cheap. With Citigroup, we have p/e compression. In 2001, the average p/e was 17.7; in 2002, the p/e fell to 13.3; in 2003, to 12.3; now, the stock is trading at a tiny 11 p/e, Citi’s lowest multiple in many years. Its earnings have been growing nicely, but the stock has not followed. At some point, this will change, and the stock will catch up with earnings. If earnings just meet current 2005 expectations and the stock trades at 12 times this year’s earnings, we will enjoy a 15% capital gain plus the 3.4% dividend yield for a total return of more than 18%. I suspect that an 18% total return will be better than average this year.
"The risk is low because of Wall Street’s modest expectations. Size is not Wall Street’s only concern. Higher short-term interest rates raise Citigroup’s cost of funds. But the prime rate has also been raised and will go up along with short-term rates. That insulates Citi from pressure on the interest-rate spread. Citigroup has always had one of the most disciplined loan/deposit pricing structures in the industry. Citigroup will make more money as the US economy grows, as there is more opportunity in a strong, growing economy. Citigroup is arguably the best financial services organization in the world, trading at a depressed p/e. I see that as an irresistible opportunity for 2005 and the next several years."