Financials sector earnings have been mixed so far. Decent numbers were reported by JPMorgan Chase & Co. (JPM, Financial), while Bank of America Corp. (BAC, Financial), Wells Fargo & Co. (WFC, Financial) and Citigroup Inc. (C, Financial) dealt with their own issues. Overall, the financials sector is expected to report a 1.8% decline in operating profits compared to year-ago levels β that would be below the S&P 500's 2.1% earnings per share climb. Volatile interest rates, weak capital market activity and concerns about the consumer are just a handful of issues at hand.
I see upside potential in shares of Citigroup. With new CEO Jane Fraser at the helm, a turnaround story may be in the works and significant earnings upside is expected.
Fourth-quarter sector earnings outlook
Company description
For background, Citigroup is among the world's biggest diversified financial services companies. It provides banking and other services to consumers, governments and corporations. Its primary services include consumer banking, credit, corporate and investment banking, securities brokerage, transaction services and wealth management. Operating in more than 160 countries, this multinational faces many risks and opportunities through its three primary segments: Institutional Clients Group, Personal Banking and Wealth Management and Legacy Franchises.
Key data
Sporting a $100 billion market cap, the New York-based diversified banks industry company within the financials sector trades at a low 8.7 forward non-GAAP price-earnings ratio and pays a high 4% dividend yield as of Jan. 12. With earnings now in the rearview mirror, shares trade with a moderate 24% implied volatility percentage, while short interest on the stock is modest at just 1.3%.
Color on the quarter
Earlier this month, Citigroup reported a mixed set of fourth-quarter numbers. Non-GAAP earnings per share verified at 84 cents, beating the Wall Street consensus forecast of just 73 cents, while revenue of $17.4 billion, down 3% from year-ago levels, was a significant $1.4 billion miss. Shares were volatile on Jan. 12, but eventually settled higher in a bit of a relief rally.
Fraser was upbeat about the quarter β she sees 4% to 5% annual revenue growth as an achievable target in the years ahead, along with an intermediate-term return on tangible common equity target between 11% and 12% within two years. That is a bold outlook, and earnings expectations are coming around to that sanguine goal, but its currently depressed price-book multiple tells me that plenty of upside is left in the stock. Citigroup's new business segmentation strategy should offer some earnings clarity and underscore the bank's growth potential. While job cuts may continue, that could prove beneficial for the stock price as the company sheds unnecessary costs.
Peer comparison
Compared to its peers, Citigroup features a relatively strong valuation as the street doubts its turnaround efforts while the recent growth trajectory has been quite soft. Still, earnings per share growth ahead may be positive headline risk, but the management team has its work cut out for them if they aim to improve the bank's profitability metrics relative to its large-cap bank peers. Share price momentum is a bright spot in the sector, while earnings per sharevisions have been mixed in the last three months.
Risks
Key risks for Citigroup include uncertainties regarding the business shift change at the company level. Macro issues are always at play β weaker economic growth this year as well as major shocks to the banking system could harm earnings and Citigroup's book value. Regulatory risks are a constant as well as higher loan loss reserves should the consumer weaken.
Valuation
On valuation, analysts at Bank of America see earnings clawing back a small portion of 2023's losses, but per-share profits are expected to accelerate in 2025 with continued robust growth in 2026. The current consensus calls for $6.02 for the current fiscal year and $7.15 in the out year. Operating earnings per share may approach $9 by 2026. Dividends, meanwhile, are expected to rise at a steady pace, making for a compelling yield.
With non-GAAP earnings multiples merely in the high single digits going forward and a price-book ratio of 0.5 on a forward basis, shares appear strong on valuation. If we apply the stock's five-year average price-book multiple of 0.64, then the stock is upward of 21% undervalued today. Moreover, if we apply a modest 10 price-earnings ratio, below the ratio of 13 for its large-cap peers, on $6.30 of earnings per share over the next 12 months, then shares should trade near $63, suggesting some 20% of upside from the current price. So, I see Citigroup as a bargain bank as 2024 progresses.
Earnings, valuation and dividend yield forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed first-quarter 2024 earnings date of Friday, April 12 with a conference call later that morning. You can listen live here. Before the reporting date, shares trade ex. a 53-cent quarterly dividend on Friday, Feb. 2.
Corporate Event Risk Calendar
The technical take
With shares fundamentally undervalued and a turnaround story underway, Citigroup's technical view shows potential, but not imminent strength. Notice in the chart below the stock is up sharply from its fourth-quater 2023 low near $38. As the January earnings date approached, shares touched an intraday high of $54.75 that dates back to March of 2022. Still, holders took the opportunity to harvest profits at a broad area of resistance. I see support around $40. While shares broke down under that mark in the fourth quarter, there may still be ample demand at that level.
Also take a look at the relative strength index momentum oscillator at the bottom of the graph β it is now working off technical overbought conditions following the earnings report. Based on the price and momentum pullbacks, the stock could very well be in a corrective pattern at the moment. Near-term support comes into play at the $47 mark β there is a small price gap there as well as that being the apex point from a consolidation from the first eight months of last year. Bigger picture, the long-term 200-day moving average is basing out right now after trending lower for many quarters β that is a hallmark of a bearish to bullish reversal. If we see shares break out above $55, then an upside measured move price objective to $68 would be in play based on the size of the current range β that's also where shares peaked in a snapback rally two years ago.
Overall, Citigroup has built a technical base, and resistance is seen at $55 with support near $40. Longer-term technical upside is in the $68 to $69 zone.
Shares approach resistance, longer-term upside to the high $60s possible
The bottom line
I see shares of Citigroup as undervalued. Following a mixed fourth-quarter report and with a new CEO at the helm, shares have some technical strength while the fundamentals appear solid from a risk-reward point of view.
