Legendary investor Warren Buffett has long been known as one of the greatest value-stock pickers of our time. Through his company, Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%), the Oracle of Omaha tries to find companies whose assets are undervalued or simply ignored by the market, which will then find their level over the long term. Here's one current Buffett stock that investors can buy for about 58 cents on the dollar.
A long grind
The large, global bank Citigroup (C 0.26%) has not fared well for quite a while now, regularly underperforming its other large bank peers and also struggling with regulatory issues. In 2020, regulators slapped the bank with a $400 million consent order and tasked Citigroup with enhancing its firmwide internal controls related to data, compliance, and risk management.
Image source: Motley Fool.
Citigroup's sprawling and disorganized operations have been on full display for the world to see. In 2020, Citigroup accidentally wired $900 million to a group of lenders; it never recouped a large chunk of that money. Recently, one of Citigroup's traders entered a transaction incorrectly and triggered a "flash crash" in several European market indexes, resulting in a brief suspension of trading.
Jane Fraser, who has now been chief executive officer of the beleaguered bank for more than a year, took over with a full plate and a lofty agenda. She got off to a fast start, announcing that Citigroup would sell or exit its international consumer banking operations in 13 markets and focus on international wealth management, while doubling down in areas the bank already excels in like certain investment banking businesses. Then Fraser made another bold decision to sell Citigroup's very profitable consumer banking operations in Mexico, which is called Citibanamex -- though the sale could take some time to conclude.
While investors were seemingly on board with Fraser's plan, Citigroup has continued to stumble. The bank took write-downs on some of the consumer banking sales, which are now well underway, and has dealt with elevated expenses to correct the regulatory issues. New regulatory capital rules and new expected regulatory capital requirements next year have limited how much stock the bank can buy back. In the fourth quarter of last year, Citigroup had to halt share repurchases as it dealt with the new regulatory capital rules. Finally, Citigroup had an outsized -- although still very manageable -- exposure to Russia. All of this has been exacerbated by difficult market conditions.
What Buffett likely sees
Buffett appears to have signed off on Fraser's strategy. Citigroup has traded at a discount on numerous occasions since the Great Recession and Berkshire has never invested, opting to go with banks like Wells Fargo and Bank of America instead.
Citigroup's international consumer units were a bit clunky and inefficient and never had enough scale to be truly viable. By getting rid of them, not only will Citigroup be simpler, but it may also decrease the amount of regulatory capital it will need to hold, which could make room for additional share repurchases. Additionally, Citigroup has achieved a certain amount of scale in several parts of its business, which will be tough for competitors to replicate. Citigroup has one of the largest investment banking operations in the world, it controls 4% of U.S. deposit market share, and it has a strong credit card brand.
The bank's Treasury and Trade Solutions (TTS) is the "crown jewel" of Citigroup. TTS plays a critical role in helping global businesses operate by providing payments, liquidity management, and working-capital solutions. Citigroup has spent decades cultivating relationships with foreign regulators and central banks, and connects to 270 different clearing systems. Its proprietary cross-currency payments system can transfer payments from 140 different currencies. This infrastructure could be helpful as Citigroup grows other businesses internationally like wealth management.
The discount
Banks trade in relation to their tangible book value, or net worth. Citigroup currently trades at about 58% of its tangible book value, which is a huge discount. Citigroup has earned its discount compared to peers after years of poor performance, but this seems overdone.
Fraser has only been at the helm for one year, and she has issues to solve that date back nearly a decade. But Citigroup does not have significant credit blemishes and still makes billions of dollars in profit each year. The banking giant also has an annual dividend yield nearing 4.5% at current levels, which I'm sure Buffett loves.
As soon as Fraser's plan starts to show real signs of progress, I think Citigroup could quickly retrace back to its tangible book value of roughly $79 per share, which implies more than 60% upside from Citigroup's current share price of about $48. It may not happen overnight, but this still creates a good long-term opportunity to buy Citigroup at 58 cents on the dollar right now.
