Summary
- Even after the Berkshire bump, Citigroup has been unable to regain a reasonable portion of its declined value in 2022.
- Citigroup trades at -47.23% of its book value and -39.3% of its tangible book value, indicating its significantly undervalued.
- Citigroup would need to appreciate by $43.87 (89.38%) to trade at a 1:1 ratio of book value and $31.73 (64.65%) to trade at a 1:1 ratio of tangible book value.
The dark cloud following Citigroup ( C ) never seems to dissipate as shares continue to decline. There was an immediate boost after Berkshire Hathaway ( BRK.A ) took a position, but shares have been unable to reclaim their lost value. C has declined by -31.81% over the past year and -22.55% in 2022. Shares of C rose above $50 over the summer but have recently declined back into the $40s, pushing its dividend yield past 4% once again. C isn’t gaining the momentum it needs, and getting back to the mid-$60 range seems like a daunting task these days. I still believe there is an opportunity in C, as the market has severely discounted C compared to many bank valuation metrics. Shares of C are trading where they were in 2013, yet C has done an incredible job boosting its revenue and earnings on a per-share basis. Shares of C touched the $80 level pre-covid and again in May 2021 but couldn’t hold on to its share price recovery. Currently, you can get paid a yield that exceeds 4% and wait for potential appreciation in its shares. I think C is the most undervalued big bank stock, and when the markets finally rebound, C could have a large rally.
Citigroup is trading where it did in 2013, yet they have driven shareholder value by increasing the amount of revenue and earnings per share it generates
C’s share price today is almost identical to where shares traded at the end of summer 2013. Since 8/26/2013, shares of C have appreciated by 1.53%. The market has punished C worse than Wells Fargo ( WFC ), while Bank of America ( BAC ) and JPMorgan Chase ( JPM ) have both appreciated well past the 100% level. The real question is, does C deserve to trade at the same level it did in 2013?
My question would be, has C generated value for shareholders? While most people would look at the chart above and answer no to that question, I would look at the income statement, balance sheet, and cash flow statement prior to giving an answer. While value is ultimately determined in a stock’s share price, sometimes, there can be a disconnect between the business operations and its stock. Just because the market isn’t rewarding shareholders with shares appreciating in value doesn’t mean that management isn’t succeeding and creating value for shareholders. Here are the items I would look for in C’s financials over the past decade:
- Has revenue increased
- Has net income increased
- How much net income has been generated
- Is revenue per share increasing
- Is EPS increasing
- Has book value increased or decreased
- Has tangible book value increased or decreased
- Has total shareholder equity increased or decreased
- Has management rewarded shareholders by allocating profits back to them
Prior to jumping to conclusions, I would read through the financials and determine the following things:
- Has management increased value for shareholders
- Is this a company in distress
- Is this a broken stock or a broken company
I read through the financials, and my opinions are that management has generated value for shareholders, the company is not in distress, and this is a broken stock, not a broken company.
Here is what I see when I read through C’s financial statements, using the trailing twelve months ((TTM)) for 2022’s numbers.
- Revenue has increased $13.39 billion (22.8%)
- Net income has increased $9.13 billion (121.06%)
- C has generated $140.98 billion in net income over the past decade
- Revenue per share increased by $16.45 (82.09%)
- EPS has increased by $5.36 (213.55%)
- Book value has increased from $61.57 to $92.95 (50.97%)
- Tangible book value has increased from $51.21 to 80.81 (57.8%)
- Shareholder equity has increased by $8.6 billion (4.52%)
- Management has rewarded shareholders through share buybacks and dividends
- Shares outstanding decreased by 1.10 billion (-36.27%)
- Dividend has increased from $0.04 to $2.04 per share (5,000%)
After reading through the financial statements, I am perplexed as to how shares have appreciated by only 1.53% since August 2013. Management has utilized its profits to grow the business and increase shareholder value. C has repurchased more than 1/3 rd of the outstanding shares and driven EPS and revenue per share higher. While increasing shareholder ownership by more than 1/3 rd, management has implemented a strong dividend program that is now paying $2.04 per share, which is a 4.16% yield. Management has also driven the book and tangible book value of C higher. I believe shares are undervalued not because of the lack of appreciation but because of how much progress has been made over the past decade and how much of a discount C trades at.
C is trading at a steep discount, and eventually, the gaps should close
From a valuation perspective, I look at how the big banks trade regarding their book value, tangible book value, and equity to market cap. I always compare C to its peers to see if the sector is trading at a discount or if certain companies are trading at a discount. For C’s peer group, I use JPM , BAC , WFC , U.S. Bancorp ( USB ), Royal Bank of Canada ( RY ), Bank of Nova Scotia ( BNS ), Toronto Dominion Bank ( TD ), and Bank of Montreal ( BMO ).
When I look at these companies, they have a share price range of $34.08 to $114.33. The interesting part is that JPM has a share price of $114.33, but its book or tangible book value isn’t the largest among the peer group. C has the largest book value at $92.95 and tangible book value at $80.81.
C is the only one in its peer group that trades at a discount to both book and tangible book value. Currently, the market is discounting shares of C by -47.23% compared to book value and -39.3% compared to tangible book value. In order to trade even to book value, shares of C would need to appreciate by $43.87 (89.38%), and in order to trade even to tangible book value, shares would need to appreciate by $31.73 (64.65%). If the sector was trading at a discount, that’s one thing, but for C to be the only outlier, I would speculate that shares of C are mispriced. C is the only big bank in its peer group that trades at less than a 1:1 ratio on price to book ((P/B)). Going back to JPM, JPM trades at a P/B ratio of 1.32 while C trades at 0.53.
After considering book value, tangible book value, and price to book I look at equity. Only 2 banks (C, WFC) have the equivalent of 100% of their market cap as equity on their balance sheet. JPM has an equity-to-market cap ratio of 0.85, indicating that the market has placed a slight premium on its equity. WFC trades at a slight equity discount as it has an equity-to-market cap ratio of 1.07. Interestingly enough, C has more than 2x its market cap in equity on its balance sheet. C trades at a 2.1 equity to market cap ratio, while there are banks such as RY that trades at a 0.61 multiple.
Conclusion
I believe C is a broken stock, not a broken company, and eventually, the value of its shares will appreciate. At the very least, there isn’t a good reason why shares of C should trade at a minimum of a 1:1 ratio of its tangible book value, let alone its book value. C is trading at a tangible book value to its market cap of 1.65x, while its closest competitor, WFC, trades at 0.79. Eventually, I believe shares will appreciate by at least $31.73 (64.65%) and trade at a 1:1 ratio to its tangible book, and maybe over the next several years, C trades at a premium to book value, making an investment today a double. I could be incorrect, but the numbers don’t lie and compared to book value and how the rest of its peer's trade, C is undervalued. I will continue to add shares, collect the large dividend and wait for the story to unfold.
For further details see:
Citigroup: Could Be Undervalued By At Least 64.65% And Pays A 4.16% Dividend Yield