What: Shares of global banking giant Citigroup (NYSE:C) rose fractionally by $0.18 in Tuesday's trading session to close at $49.39 following an upgrade to "buy" from "hold" from research firm Deutsche Bank.
So what: According to Matt O'Connor, the covering analyst for Deutsche Bank, much of the expected earnings risk that Citigroup could face over the near term has likely been baked into its share price. O'Connor specifically notes that he and his firm believe EPS estimates for Citigroup are about 5% too high for fiscal 2015 and 8% too high for fiscal 2016. Still, he contends, that places Citigroup on par with its peers even with reduced 2016 EPS estimates, all while placing the company at a 15% discount to its tangible book value. By comparison, most U.S. money center banks are valued at 1.2-1.3 times tangible book value.
Additionally, O'Connor and Deutsche Bank are forecasting that Citigroup will repurchase approximately $1 billion worth of its common stock per quarter in 2015. With the Federal Reserve set to review banks' balance sheets, Deutsche anticipates that Citigroup will get the green light to return capital to its shareholders.
All told, Deutsche Bank raised its price target on Citigroup to $54 from $51, implying an additional 9% upside to the stock based on Tuesday's closing price.
Now what: The question investors really need to ask here is this, "Can you bank on this upgrade of Citigroup?"
While I do agree with Deutsche Bank's assessment that Citigroup's chances of being able to distribute more to its shareholders have improved from the previous year, I'm not nearly as much of a fan of Citigroup as they are. Although it's cheap, Citigroup is underperforming in areas where its peers are excelling.
In its fourth-quarter earnings results Citigroup announced just $0.06 in EPS, $0.03 below what Wall Street was expecting. It blamed the miss on a number of one-time legal and repositioning charges. It also saw weakness in its securities business, but to be fair nearly every global bank did in Q4. But, what truly concerns me is the 4% decline in constant dollar deposits and the 1% decline in constant dollar loans. Deposits and loans are the bread and butter for the banking industry, and many of its peers are seeing these metrics rise.
However, what investors may not realize is that Citigroup gets a good chunk of its business from outside the United States. This does allow Citigroup to take advantage of emerging market growth opportunities, but it also exposes the company to weakness in Europe and to a rising U.S. dollar.
For now I'd suggest patiently waiting on the sidelines until we witness some improvement in Citigroup's basic banking operations.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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