Editor's note: This article was updated July 16, 2004.

Let me prepare the table on the danger of slavish devotion to the Price-to-earnings ratio. There is a real danger for people who oversimplify by just counting on the P/E to determine what is expensive and what is not, failing to consider what one-time charges, or non-cash charges go into the actual calculation of earnings.

Citigroup (NYSE:C) is going to look more expensive than it actually is for the remainder of the year, due to a $4.95 billion charge to earnings the company had to take this quarter to prepare for legal costs related to its part in multibillion-dollar scandals at WorldCom -- now MCI (NASDAQ:MCIP) -- and Enron. For investors with short attention spans, they're going to just bake the net earnings number into their analyses, and they're going to come up with a conclusion that is wrong.

Naturally, there are few companies out there that could absorb $5 billion in charges and still post a profit. And what we're talking about here is the quarter, not the year: Citigroup, despite this massive charge against earnings, still managed to earn $1.14 billion, or $0.22 per share. If you add back the amount of the charge, then Citi's earnings for the quarter would have been $1.02. Ah, yes, there was one other thing: Citigroup sold its 20% stake in a Saudi Arabian bank, Samba Financial, giving it a gain on sale of $756 million, or $0.15 per share. (Is it just me, or does "Samba" sound a wee bit more Brazilian than it does Saudi?)

These all, of course, are events that matter to Citigroup from a financial perspective. But these are not recurring events. Citigroup cannot continue to sell that same 20% stake in a Saudi bank, nor (for shareholders' sake) should one expect recurring multibillion legal charges and fines. My own opinion? Citigroup, Merrill Lynch (NYSE:MER), Credit Suisse Group (NYSE:CSR), and other banks that behaved so badly in the late 1990s got off light. As such, I've got to admit that I have trouble writing much nice about Citigroup. It's not nice to take money away from old ladies.

Each of Citigroup's main operating components showed spectacular top- and bottom-line growth in the quarter over the same quarter last year. Given that last year's comparable quarter straddled the Iraq war and the concomitant uncertainty, perhaps this is not much of a surprise. Areas where Citigroup has variable rate debt, in particular its burgeoning credit card division, should see at least an initial tailwind as those rates slide higher with the small Fed rate increase, but traditionally, financial companies do not perform as well in rising interest rate environments.

Ignore anyone who attempts to pin that as a justification of the valuation of Citigroup or any other financial company. It is well to remember that the Fed has kept interest rates at what are emergency levels for more than two years -- an unprecedented act, and the recent small bump up doesn't change the fact that interest rates are still set at a desperately low level. What happens, then, when rates rise from a 4% level and what happens in an economy where the Fed has essentially dropped bags of money on street corners are likely to be very different things.

Citigroup had, depending on how you look at it, a very good quarter, or a very bad one. I think that the quarter was exceptional, once you take out all of the charges and gains. However, I'm not quite sure how the environment could be any more tilted in Citigroup's favor. This will come to an end, one way or another. What the company has going for it is its wide reach, in terms of products and geography. I'm not sure how things could go much better than they did in this most recent quarter, everywhere, in every way.

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Bill Mann owns none of the companies mentioned in this story. He's written in the past on evaluation methodologies for financial companies. Looking for income-generating investments? How'd you like to have two of them show up in your mailbox each month? Take a free trial to Mathew Emmert's Income Investor today!