Citigroup Inc (C)

[Enterprising Investor]

Citigroup Shares Could Rise by 50% (7/29/17)

The bank’s earnings could compound at a 20% clip through 2020, lifting the shares to $100.

By Andrew Bary

After years of restructuring and repositioning, Citigroup last week laid out some ambitious financial targets at its first investor day since 2008, and Wall Street liked what it heard.

Citigroup shares (ticker: C) finished the week up 2%, at $67, approaching their highest level since the financial crisis, when the then-troubled bank raised capital and massively diluted its shares. There could be more upside because Citi offers the combination of a low valuation and what could be the highest earnings growth rate among its peers in the years to come.

The bank is targeting $9 a share in 2020 earnings, up from a consensus estimate of $5.16 this year, a 20% compound annual growth rate. The bank suggested its stock could hit $100 in this scenario, 48% above the current level.



In the wake of a series of stress tests, the bank was recently allowed by the Federal Reserve to double its dividend payout, lifting the yield near 2%. Citi may also repurchase 8% of its shares in the coming year. It has clearance to return about $19 billion in capital to shareholders in the next 12 months, and it’s hoping to return $20 billion-plus in each of the following two years.

Considering its lofty financial goals and global footprint, Citigroup looks inexpensive at 11.4 times estimated 2018 earnings of $5.92 a share. The stock trades at its tangible book value of $67 a share, the lowest valuation among its rivals. Industry leader JPMorgan Chase (JPM) fetches almost 1.8 times tangible book.

Citigroup’s stock, up 13% in 2017, “has been the best performer in the group this year, but there could be another leg to the story in the next few years if the bank can close the profitability gap relative to best-in-class peers like JPMorgan,” says John McDonald, a banking analyst at Bernstein who has an Outperform rating and a $75 price target. He notes that Citi is aiming to lift its return on tangible common equity to 11% in 2020 from about 8%; JPMorgan is already at 14%.

McDonald says investors want to see if Citi can generate consistent growth in revenue and operating profit. There is no Street consensus estimate for 2020, but the 2019 projection is $6.90 a share. That’s below the $7.50 or so that’s consistent with Citi’s financial targets.

Citigroup executives, led by CEO Michael Corbat, were eager to tell an upbeat story after a period of what Corbat called “tough decisions in terms of our capital, our balance sheet, and business model.” The bank’s returns have trailed those of its peers— Bank of America (BAC), JPMorgan, Goldman Sachs Group (GS), Morgan Stanley (MS), and Wells Fargo (WFC)—and earnings per share last year of $4.72 a share were little changed since 2013.

“THE REPOSITIONING IS DONE, and we’re poised to deliver attractive and sustainable returns. We have an unparalleled global presence and industry-leading franchises supported by robust capital and liquidity,” Citigroup Chief Financial Officer John Gerspach tells Barron’s. The bank operates two divisions: a worldwide consumer bank and an institutional client group that includes a large bond- and equity-trading business.

The $9-a-share earnings target for 2020, while achievable, might be a stretch. Citigroup is banking on half the earnings gain coming from a huge share-repurchase program, 40% from improved business performance, and 10% from the impact of higher interest rates. The bank is seeking to generate 3% overall annual revenue growth, including 5% per year in the consumer bank. These revenue assumptions are in line with recent results.

KBW analyst Brian Kleinhanzl wrote that Citi will need 10% compound growth in annual revenue in its U.S. retail bank and its leading Mexican bank, Citibanamex, to hit those targets. Citi is also assuming a robust global economy and benign credit costs.

If the bank gets half of its projected business improvement, the stock could do well, given the earnings growth from other factors, one investor tells Barron’s. Gerspach says financial targets “aren’t dependent on heroic performance from any one business, geography, or product.”

Citi’s strengths include the largest international reach among its peers, with a sizable presence in the developing world. Citigroup is strong in Asia, where it has consumer operations in 12 countries, including Hong Kong and Singapore.

The bank gets nearly half of its revenue from outside the U.S., the highest percentage in its group. Leveraging off its worldwide presence, Citigroup operates the largest proprietary global-payments system; it’s also the No. 1 global credit-card issuer.

Since 2012, to streamline its business and lift returns, Citi has cut the number of consumer markets in which it operates to 19 from 41, shrank its institutional client base by more than half, and reduced head count by 15%.

“We aren’t looking to drive the value of the stock up today or yesterday. We wanted to offer investors a clear set of metrics going forward that will drive the value of the stock,” Gerspach tells Barron’s. If Citigroup even comes close to meeting its goals, its profit should be a lot higher by 2020, and the stock could reach $100.

http://www.barrons.com/articles/citigroup-shares-could-rise-by-50-1501306476