The Wealth Advisory. Citigroup Inc. Our Recommendation 12/04/2009. Buy, Sell, or Hold (NYSE: C) INVESTMENT GRADE. December 3, 2009

Transcription

1 The Wealth Advisory An Angel Investment Research Publication Buy, Sell, or Hold December 3, 2009 (NYSE: C) Citigroup Inc. B- INVESTMENT GRADE Our Recommendation 12/04/2009 BUY HOLD SELL A+ A A- B+ B B- C+ C C- D+ D D- F+ F F- Up/Down volume pattern indicates Accumulation Moving Average Convergence/Divergence indicates a Bearish Trend. Chart pattern indicates a Weak Downward Trend. The 50 day Moving Average is falling which is Bullish. The 200 day Moving Average is rising which is Bullish. Current Share Price: $4.12 Stop/Loss: $ Mo. Target: $7.17 Corporate Information Citigroup Inc. Investor Contact: shareholderrelations@compushare.com Address: 399 Park Avenue New York, NY (212) Website: http;// Officers: in This Issue Company Overview...Page 2 Key Statistics...Page 2 Recent Company Highlights...Page 2 Technical Outlook...Page 3 Historical Values......Page 3 Analyst sentiment......page 3 Industry Overview...Page 5 Peer Review...page 5 Growth Estimates...Page 5 Income Statement...Page 6 The Bottom line...page 7 CEO- Mr. Vikram S. Pandit President-Mr. William McNamee Sector: Finance Founded:1901 Employees: 326,900 The Wealth Advisory Page 1

2 Company Overview Citigroup Inc., a global financial services company, provides consumers, corporations, governments, and institutions with a range of financial products and services. The company has two primary segments, Citicorp and Citi Holdings. The Citicorp segment operates as a global bank for businesses and consumers with two primary businesses, Institutional Clients Group and Regional Consumer Banks. The Institutional Clients Group serves corporate, institutional, public sector, and private banking clients. The Regional Consumer Banks business provides traditional banking services, including retail banking, and branded cards, and small and middle market commercial banking in North America, Asia, Latin America, and Europe, Middle East, and Africa. The Citi Holdings segment has three businesses: Brokerage and Asset Management, Local Consumer Finance, and Special Asset Pool. The Brokerage and Asset Management business includes the 49% stake in Morgan Stanley Smith Barney, Nikko Cordial Securities, Nikko Asset Management, and Select Global Asset Management operations. Citigroup Inc. has approximately 200 million customer accounts and operates in approximately 140 countries. Recent Company Highlights In June 2009, Citi was removed from the Dow Jones Industrial Average. The move was prompted by a number of issues, including its share price dropping more than 90% over the prior 12 months. Additionally the company received $45B in TARP funds, which it used to extend $36.5B in loans. As a result, the bailout has given the government a 35% stake in company. That bought the beleagured bank time to repair its balance sheet and recapitalize. Citi s third quarter report has shown that process is well underway and moving the company towards those goals. In fact Citi Holdings share of distressed assets fell $32 billion to $617 billion during the quarter and are now down $281 billion from the peaks in the first quarter Addtionally, the completion of exchange offers resulted in an additional $64 billion in Tier 1 Common and $60 billion of Tangible Common Equity. As a result, Tangible Common Equity and Tier 1 Common ratios improved during the third quarter to 10.3% and 9.1%, respectively. Tier 1 Capital, meanwhile, remained stable at 12.7%. For the third quarter, Citigroup reported net income of $101 million, resulting in a $0.27 loss per share. Tangible book value was $4.47 per share to end the quarter, well above its current share price. Key Statistics C: NYSE 52 W Range: $ P/E: N/A Forward P/E: PEG Ratio: N/A EPS (ttm): -$2.78 EPS next year: $0.30 Income(ttm): $38.99 B Shs Outstand: B Market Cap: $18.16 B Shs Float: B Book/sh: $6.14 Cash/Sh (MRQ): $34.21 Profit Margin: % ROE: % ROA: -0.73% Total Cash (MRQ): $ B The Wealth Advisory Page 2

3 Technical Outlook BHistorical Tangible Book Value BHistorical Earnings Moving Average Analysis 10-day 4.19 DOWN 20-day 4.15 DOWN 50-day 4.38 DOWN 200-day 3.54 UP Volume Analysis Avg Daily (00 s) MO Chg (%) OBV Bearish UP/Down Vol. Bearish Technical Analysis RSI (14) 51.0 Beta 2.79 MACD ST Bullish MACD LT Bearish Notes: Shares of Citigroup rallied nicely in August on news famed hedge-fund investor John Paulson was accumulating shares. Since then shares have fallen back to the trendline after hitting highs of $5.23. In action since the pullback began shares have put in higher lows building upon support at the $4.00 level. This is slightly above Paulson s average purchase price of $ Technical Score BHistorical P/E Ratio--5yr avg Ratings Distribution 4 Strong Buy Buy Neutral Sell Strong Sell Analyst Sentiment Below is the breakdown of the 20 analyst ratings for Citigroup Inc. (C). By averaging these ratings investors are given insight into the consensus opinion of the independent research community on a given security. 12/01/09 11/15/09 10/15/09 09/15/09 08/15/09 Strong Buy (Rating=1) Buy (Rating=2) Hold (Rating=3) Sell (Rating=4) Strong Sell (Rating=5) AVERAGE RATING: The Wealth Advisory Page 3

4 Industry Overview Needless to say it has been a tough year for the financials. However, since the stress tests in May, the largest banks have had no trouble raising capital at an attractive price. As a result the banking industry has been able to recapitalize its balance sheet. That will enable the industry to better withstand further write downs of troubled loans and securities. What s more, several banks have already paid back their TARP funds further signifying their ability to operate on their own. By our analysis, the fundamentals continue to look strong for the banking industry driven by low rates and high margins on new loan generation. This working of the yield curve will boost profits well into the next 3 or 4 quarters as the mortgage banking income remains strong. And while loan loss provisions are not yet over by any means, it looks like reserves will continue to build as the growth of nonperforming loans declines over time. Additionally, more narrow credit spreads should result in gains reversing the pattern of unrealized losses. Beyond that, the deleveraging process across the industry will continue to inch along as the excesses are wrung out of the system. In that regard, Citigroup has actually made the most progress among its peers by reducing its leverage below historical norms. For the third quarter, Citi s leverage stood at just 18.5 well below its average of 27.4 from Of course, the key deleveraging event for Citigroup was the conversion of $58 billion preferred stock, including a $25 billion U.S. government stake, into common equity in September. That transaction brought Citi s leverage down from 50.8 at the end of the second quarter. Peer Review Price/Earnings C: N/A Peer Avg: C s P/E is negative. In the absence of a valid ratio that makes this measure of value practically meaningless. However, when compared to Bank of America, its closest competitor, that becomes less of a factor since BAC s P/E is a lofty Price/Sales C: 0.97 Peer Avg: 1.68 Compared to its peer average, C is trading at a discounted P/S multiple. Additionally, C is trading below the P/S ratio of BAC (2.17). Price to sales ratios are how each investor values each dollar of sales. Price/Projected Earnings C: N/A Peer Avg Compared to its peers on this metric C s multiple cannot be measured. This renders this measure of value as meaningless. Price/Book C: 0.67 Peer Avg: 0.89 Compared to its peer average, C is trading at a book value discount. It is calculated by dividing the current by the latest quarter s book value per share. Price/Earnings Growth C: N/A Peer Avg: 1.20 Compared to its peer average, C s PEG ratio cannot be measured. PEG is a widely used indicator of a stock s potential value. A PEG ratio of 1 indicates the company is fairly valued. Price/Cash Flow C: N/A Peer Avg C s P/CF cannot be measured. P/CF is a measure of the market s expectations of a firm s future financial health. In theory, the lower a stock s price/cash flow ratio is, the better value that stock is. Growth Estimates Dec. 2009* Dec. 2010* Past 5 Years Next 5 Years Forward P/E PEG * C % % % 5.0% Industry % 23.70% % 10.8% S&P % 22.60% -2.70% 0.00% Fundamental Score *year ending The Wealth Advisory Page 5

5 Income Statement (Non-Cumulative)-Last 5 quarters Total Interest Income (000 s) Total Interest Expense Net Interest Income Loan Loss Provisions Fee & Service Revenue Trade Profit/(Losses) Other Non-Interest Income Net Non-Interest Income Total Non-Interest Expense Income Tax/(Credit) Minority Interest Special Income/Charges Q3 9/09 Q2 6/09 Q1 3/09 Q4 12/08 Q3 9/08 18,678,000 19,671,000 20,609,000 23,911,000 26,182,000 6,680,000 6,842,000 7,711,000 10,658,000 12,776,000 11,988,000 12,829,000 12,898,000 13,253,000 13,406,000 9,095,000 12,676,000 10,307,000 11,292,000 9,067,000 4,303,000 6,909,000 5,988,000 8,743,000 3,425, , , ,000-8,230,000-3,509,000 4,374,000 10,391,000 5,894,000-7,308,000 2,753,000 9,104,000 17,835,000 12,639,000-7,658,000 3,274,000 11,790,000 11,967,000 12,074,000 24,906,000 14,417, , , ,000-10,975,00-3,294,000 74,000-34,000-16, ,000-95, , , ,000-3,574,000-16,000 Net Income From Continuing Operations Net Income From Discontinued Operations Net Income From Total Operations Other Gains/(Losses) Total Net Income 593,000 4,387,000 1,610,000-21,106, , , ,000-33,000 3,843, ,000-29,000 4,245,000 1,577,000-17,263,000-2,815, ,000 34,000 16, ,000 4,279,000 1,593,000-17,263,000-2,815,000 Fully Diluted EPS: The Wealth Advisory Page 5

6 The Bottom Line. We must admit that on the face of it, an investment in Citigroup seems tenuous given the continued economic downturn. However, on a price-to-book basis, Citigroup is cheap trading at 0.9 times tangible book value. In fact, among peers, both Citigroup and Bank of America are the only big banks that trade as such which is likely why John Paulson has made such a big wager on their eventual return from the abyss. And with Citigroup's liquidation price of just $4.47, we believe a long term investment in the bank makes sense from a value perspective. What's more, with a return to profitability, Citigroup should eventually move beyond the crisis with a tighter business model as it focuses on a few core areas, casting aside the businesses that cost it heavily during the bubble. In the short term, we also think that a planned move towards a TARP repayment and the delay in FASB 166/167 will be enough to boost the stock as the company's earnings and loan loss provisions improve. As such we rate Citigroup Inc. (NYSE:C) as a buy below $4.12. Analysis of the stock s worth based on our proprietary quantitative model is as follows: Stock...C Earnings per share... $ yrs EPS Growth Rate % % Perpetual Growth Rate %...5% Benchmark Return...10% Risk-adjusted price...$4.26 Non-risk adjusted price...$7.17 Investment Report Prepared by: Steve Christ, Investment Director of the The Weath Advisory 67 Total Score Wealth Advisory Research Methodology: The Wealth Advisory s proprietary stock model projects a stocks total return for a 12 month forecast. While our pricing model uses primarily objective elements to arrive at our BUY, SELL, or HOLD ratings, subjective analysis influences the final recommendation. These and many more other data points are then combined, ranked, weighted, and tested to create a total analysis of a given stock. The result is a system that combines both fundamental and technical analysis in a disciplined method of selecting stocks. This material is based upon information that we consider to be reliable, but neither Angel Investment Research nor The Wealth Advisory warrant its completeness, accuracy, or adequacy and it should not be relied upon as such. Assumptions, opinions, and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither Angel Investment Research nor The Wealth Advisory are responsible errors or omissions or for the results obtained from using this information. Past performance is not necessarily indicative of future results. This material is nor intended to as an offer or solicitation for the purchase or sale of any security or financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice and only correct as of the stated date of the issue. Prices, values or incomes from any security mentioned in this report may fall against the interests of the of the investor and said investor may get back less than the amount originally invested. The information contained in this report does not constitute advice on the tax consequences of making any investment decision. This material is not interned for any specific investor and does not take into account your particular investment objectives, financial situation, or need and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this report, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Copyright 2009, Angel Publishing LLC, P.O. Box 84905, Phoenix, AZ All rights reserved. Unauthorized reproduction of this newsletter or its contents by Xerography, facsimile, or any other means is illegal and punishable by law. The Wealth Advisory Page 6