When I'm looking for good value stocks with growth potential, there are a few different qualifying criteria I consider as a starting point. Then I look at the industry, the macroeconomic environment, how well managed the company is, and its competitors, among other factors. In the banking industry, there's one stock, in particular, that jumps out for consideration as it delivers on all these fronts. That stock is Citigroup (C -1.45%).
Let's take a closer look at why Citigroup is one of the best value stocks out there right now.
Citigroup is turning a corner
Citigroup is well known to most investors as one of the largest banks in the country. It is considered one of four national megabanks, but has underperformed the top two, JPMorgan Chase and Bank of America in recent years.
But Citigroup seems to have turned a corner, with a new CEO, Jane Fraser, the first woman to run a major U.S. bank, and several new initiatives in place. The stock price is up 15% year to date, which trails all three of its major rivals, but it is in a good position for long-term growth.
For starters, it is a great value. It is currently trading at seven times earnings, with a forward price-to-earnings (P/E) ratio of 8.7. Its price-to-book (P/B) ratio is 0.77, which means it is trading below the value of its assets. These numbers indicate a stock that is attractively valued, particularly when you factor in its growth potential and management efficiency.
The company has a price-to-earnings-growth (PEG) ratio of 0.98, which means it is priced below its expected growth rate, also indicating a good value. Further, it has a robust operating margin of 37.7%, which means it makes that percentage in profit on every dollar after all expenses are subtracted. This is a solid percentage and speaks to the company's efficiency. Another good measure of efficiency is the return on equity, or ROE, which was 13% at the end of the second quarter. That is higher than the average ROE in the banking industry.
The efficiency ratio was at 64% at the end of the second quarter, which is higher than it has been in recent years, but that largely stems from an increase in expenses this year related to several factors, including increased marketing, the transformation of the business to focus on strengths, and a more than $1 billion investment in improving internal controls. These initiatives should all benefit the company in the long run and improve its efficiency.
Citigroup is on the right path
As mentioned, Fraser seems to have the company on the right path to grow from this current low valuation. In one initiative, Citi made a $1 billion investment in improving the internal controls follows a couple of major snafus last year. In one instance, it paid out $900 million to the wrong vendor. In another, it got hit with a $400 million fine by the federal regulators for "unsafe or unsound banking practices" and a "failure to establish effective risk management and data governance programs and internal controls."
Another strategic initiative is to exit consumer banking in 13 international markets in Asia and EMEA (Europe, the Middle East, and Africa) that have generated lower growth rates. Instead, more assets will be focused on four higher growth international wealth centers -- Singapore, Hong Kong, the United Arab Emirates, and London.
In addition, Citi will shift resources and invest in the businesses that Fraser expects to drive the most growth, namely Treasury and Trade Solutions, commercial banking, and wealth management. "I'm very confident in the growth and return prospects these connected franchises will afford us," Fraser said on the second-quarter earnings call. "We're going to put our entire vision for the firm in front of you, so you can then hold us accountable for executing against it."
Analysts are bullish on Citigroup, as they see a consensus 18% increase in the stock price over the next 12 months from its current $71 per share. Barring any more lockdowns from the delta variant of the coronavirus, the economy is growing rapidly, and those economic tailwinds should help propel this megabank to solid returns. At this price and valuation, it's the right time to buy.