Citigroup Inc. (C, Financial) one of the big four banks in the U.S., has fallen 10% so far this year and is trading at an attractive $67.14 per share on the New York Stock Exchange. As a result, it is convenient at current valuations.
The significant drop in the value of the stock was reportedly triggered by action unfavorable to the bank by the Bureau of Consumer Financial Protection. The regulator ordered it to pay back $335 million to credit card consumers who were affected by the bank's failure to reduce annual percentage rates. The action affected approximately 1.75 million accounts.
The stock underperformed the S&P 500 index by nearly 12% over the same period. Instead, when the stock is observed over the last 52-weeks of trading, the share price is below the 200, 100 and 50-SMA lines and just $3 off the 52-week low of $64.38. It will take more than 20% for Citigroup to fill the gap in order to approach its 52-weeks high of $80.70 per share. The stock market is currently valuing in $171.2 billion. There are about 2.55 billion shares outstanding.
The Peter Lynch chart also signals an undervalued stock. GuruFocus indicates that the share price is trading below the Pete Lynch Earnings Line (P/E = 15) of $77.8 and is emulating the Price at Med P/E without NRI (P/E = 12.34) Line of $64 per share.
Furthermore, at 0.94 times the stock is trading its book value at 32% discount to the industry median of 1.24 times.
As of the most recent quarter, the balance sheet of Citigroup shows $1.92 trillion in total assets, of which 18.3% are long-term investments The bank reported $1.72 trillion in total liabilities. Total debt amounts to $495.51 billion for a total debt equity ratio of 136%. The industry stands at 63%. GuruFocus doesn’t show the interest coverage ratio of Citigroup, however, it ranks with 4 out of 10 the entire financial situation of the U.S. bank. Even though the rating is moderate, it suggests that Citi can carry the burden.
Loan-to-assets ratio is 35%, which means that at Citigroup the generation of the net profit is more dependent on asset management and trading activities than its peers such as Wells Fargo & Co. (49.7%) and Bank of America (40.1%).
The price-earnings ratio is negative because Citigroup closed fourth quarter of 2017 with a net loss of $18.3 billion due to the enactment of the Tax Cuts and Jobs Act.
However, on an operating basis for the trailing twelve months the price-earnings (P/E) ratio is 11.86 times granting 8.4%. The earnings yield of Citigroup is more than double the monthly average spot rate of the 20-year high-quality market corporate bond. At 3.61%, the average is a mean value of the last 12 monthly spot rates. High quality corporate bonds are those rated AAA, AA or A.
Citigroup has paid dividends for more than three decades at a tune of a cash quarterly distribution of 32 cents. If held constant, the quarterly payment yields an annual forward dividend of $1.29 granting 1.9%. According to the planned capital actions of the U.S. bank, the quarterly dividend will be increased to 45 cents per common stock.
The downtrend in the share price sent the dividend yield 0.1 percentage points beyond the S&P 500's dividend yield of 1.81%.
As part of its guidance for 2018, Citigroup also plans to buy back a portion of its own stock, returning to the shareholders up to $17.6 billion from the third quarter of 2018 to the second quarter of 2019.
The U.S. bank will fund the dividend increase and the transaction with cash flow and liquidity that stood at $700.23 billion, or $274.64 per share, as of the most recent quarter. Citigroup generated cash flow of $1.42 billion from operations and $71.67 billion from sales over the last 12 months of trading.
The stock is trading at its trailing 12-month sales 2.46 times, which is below the industry median of 3.56 times.
Higher interest rates predicted for 2018 should boost the performance of Citigroup’s assets. The bank should see an improvement in its margins and return on assets and equity.
For the period from full fiscal 2018 to full fiscal 2019, consensus is for 13.9% growth in net earnings. For the next five years, analysts estimate that the yearly net profit of the U.S. bank will grow according to a 13.85% average rate.
As of July 2018, a total of 17 analysts of a total of 29 suggested buying the stock and 10 analysts recommend holding shares of Citigroup. One analyst thinks the stock will underperform within the next 52-weeks of trading. A second analyst recommended taking some profit off the table.
The recommendation rating on Citigroup is 2.1 out of 5.
With an average target price of $83.54 per share, the consensus is for a 24.4% stock appreciation to occur within the 52-weeks of trading. The average is a mean value of 26 estimates ranging from $62 to $101 per share.
In addition, the market is assessing next year's earnings at 10.41 times. When the forward price earnings ratio is multiplied by a net profit of $7.17 per share, it yields a value of $74.64 per share. The earnings per share of $7.17 is a quarterly weighted average for the period from the third quarter of 2018 to the second quarter of 2019.
On Friday, Citigroup is expected to release figures on the second quarter of fiscal 2018 before the opening bell. Earnings are predicted to range between $1.49 per share and $1.62 per share with a mean of $1.57 per share.
The U.S. bank is expected to have billed customers for $18.49 billion, which is a mean of a range of $17.36 billion to $18.98 billion. A total of 21 analysts were surveyed on earnings while a total of 19 analysts were surveyed on revenues.
(Disclosure: I have no positions in any security mentioned in this article.)
