July 27, 2015

Citigroup stock prospects have improved

My principal take on second-quarter results is that profit visibility has improved at  Citigroup, thus laying the foundation for both an attractive earnings growth case and a price-to-earnings multiple improvement story that may close the 10% valuation discount of Citigroup relative to its peers.

A larger-than-expected loan reserve release largely led to the 10-cent earnings beat in the second quarter.

Most of the other components were in line.
-    Core revenues were on target at $19.2 billion.
-    Consolidated expenses were under control.
-    Fixed income, currency and commodities (FICC) was slightly better.
-    Equities were slightly weaker.

Citigroup raised guidance for the full-year efficiency ratio in its global consumer bank back toward the higher end of the range.

Capital is solid, with a Basel III ratio at 11.4%.

After experiencing outsize EPS growth of more than 20% this year, 7% to 9% annual earnings growth is anticipated for 2016 and 2017.

Citigroup is trading at about nine times my 2017 estimate of $6.50 a share and only at about 0.7 year-end tangible book value in 2017, which makes it one of the few money center banks trading at under book value.

In response to a healthy profit progression over the next few years I expect C's dividend to increase from an annual rate of 20 cents a share to 70 cents.

My 12-month price target is about $65 to $67 a share. But more importantly, the three- to five-year story has improved.

Position: Long C 

via http://www.thestreet.com/story/13223082/2/netflix-citigroup-and-the-banks-doug-kass-views.html