Citigroup Looks Cheap

05/26/2014 7:00 am EST


George Putnam

Editor, The Turnaround Letter

Our latest turnaround idea traces its roots back to 1812; through ups and downs over the next two centuries, it grew into one of the world’s largest financial institutions, observes George Putnam, editor of The Turnaround Letter.

During the financial meltdown in 2008, the leverage in various divisions at Citigroup (C) almost brought the whole company down.

The stock, which had traded as high as $570 (adjusted for a 1-for-10 reverse split) in late 2006, fell as low as $10 in early 2009.

When Citigroup began to stabilize in 2009, it split into two business units: Citicorp, which contains most of the company’s core retail and institutional client businesses, and Citi Holdings, which includes the asset management and brokerage businesses as well as other assets that it planned to sell off.

In 2012, former CEO Vikram Pandit—who came from the hedge fund world—was replaced by company veteran Michael Corbat.

Corbat has focused on strengthening Citi’s core businesses and divesting non-core and unprofitable assets. The company is making good progress on both fronts.

On the core business front, Citi retains a strong global presence and a powerful brand name. More than half of its business comes from outside North America, with an increasing portion from high growth emerging markets.

On the non-core front, management has reduced the assets in Citi Holdings by almost 50% from 2011 through 2013 and brought the unit’s bottom line up to break-even.

From a valuation perspective, Citi looks cheap, both historically and compared to its peers. It currently trades at 0.85 times Tangible Book Value (TBV) compared to 1.7 times for other large banks.

On an earnings basis, Citi currently trades at ten times estimated 2014 earnings, compared to more than 15 times historically.

While the Fed recently denied Citi’s request to increase its dividend and share repurchase program, we believe that Citi will be able to get the Fed’s blessing in the not-too-distant future. In the meantime, the denial gives investors a good opportunity to buy the stock cheaply.

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