Stocks moved ahead today, with the Dow Jones Industrial Average (^DJI 0.06%) and the S&P 500 (^GSPC -0.22%) up 0.6% and 0.2%, respectively. The Dow's top gainer was Bank of America (BAC 1.53%), up 5.7%, but the story was about its nearest rival:
The micro view: Citigroup's (C 0.26%) new CEO, Michael Corbat, is making his mark on the company he inherited from Vikram Pandit -- with an ax. The bank announced today it will cut 11,000 jobs worldwide (4.2% of the workforce, as of the end of the third quarter), taking a $1 billion fourth-quarter charge in the process. The market cheered the announcement, bidding the shares up 6.3%, adding $6.4 billion to company's market value.
The cost-cutting plan aims to deliver $900 million in savings next year and $1.1 billion annually beyond that, with a loss in annual revenue of $300 million, for incremental profit of $800 million. Discount that "annuity" at a back-of-the-envelope cost of equity of 10.5%, and you get $7.6 billion. Adjust for the upfront charge and the lower savings in year one, and you get:
$7.6 billion-$1.0 billion-$200 million = $6.4 billion
Maybe there is something to this market efficiency voodoo, after all. In any event, shares of Citigroup's closest competitors, Bank of America (BAC 1.53%) and JPMorgan Chase (JPM 0.65%), traded up in sympathy, with gains of 5.7% and 1.6%, respectively. The difference in appreciation between the two suggests the market believes B of A is a better candidate for a similar cost-cutting program than JPMorgan -- I agree.
Even after today's pop, JPMorgan is the only among the three that trades at a premium to its tangible book value. B of A and Citi trade at a rather remarkable discounts -- 21% and 31%, respectively. That suggests the potential for further gains is far from exhausted. To find out why our top financials analyst wrote recently that owning B of A shares "could result in a double or triple within the next five years," click here to receive our premium report, which includes a full year of ongoing coverage.
