C Has a Deep Kitchen Sink

Updated from 3:50 p.m. EST on Jan. 14.

Citigroup (C - commentary - Cramer's Take) reported a fully diluted fourth-quarter 2007 (ending December) loss of $1.99 per share (down 293% vs. earnings for the same quarter last year/96% negative surprise vs. consensus) on ongoing revenue of $7.2 billion (down 70% vs. same quarter last year/14% negative surprise vs. consensus).

These negative surprises are all the more powerful given Citigroup's high-profile problems and already decimated expectations. Of note, the company wrote down $18.1 billion of its mortgage exposure vs. a $6 billion writedown in third quarter 2007 and further increased loan-loss reserves by $4.1 billion, indicating further pain to come.

As of year-end 2007, Citigroup still had $37.3 billion in direct subprime mortgage exposure, down from $54.6 billion three months prior. The company also had $21 billion in unfunded leveraged loan commitments, down from $38 billion.

Citigroup's management does not believe that fixed-income business volume (particularly collateralized debt obligations) will recover to old levels. To boost Citi's ailing Tier 1 capital ratio, then, management announced a 41% dividend cut and an additional $14.5 billion in new capital to be sourced from preferred stock sales to sovereign wealth funds and existing shareholders in Singapore, the U.S. and the Middle East. This injection augments the $7.5 billion capital injection just received in November.

New CEO Vikram Pandit also said that his strategic review is "not yet finished," meaning that noncore operations remain open to restructuring and/or disposal. To that end, Citigroup slashed 4,200 jobs during the fourth quarter (in addition to 17,000 layoffs announced in spring 2007), with more cuts planned in the immediate future.

Coincident with today's release, S&P downgraded Citigroup's credit rating from AA to AA-minus, with a negative outlook.

Following a premarket conference call, Citigroup shares opened down 4% to 6%, reflecting lower-than-rumored writedowns/layoffs and a very weak broad market open. Investors may now try to fill the morning gap and begin to solidify a "kitchen-sink/investor washout" theory.

Five-year level support at $26.50 is only 5% below the current price, and the top $55 band of the wide eight-year trading range equates to 97% upside to long-term resistance. Citigroup is also selling at a 25% discount vs. industry, albeit with inferior growth prospects. As well, technicals are ugly but have demonstrated near-term optimism.

Before jumping in, though, investors would be wise to consider continuing secular housing troubles and 20% to 45% potential downside should $26.50 price support fail.

C Preview: Knives Are Two-Sided

Citigroup (C - commentary - Cramer's Take) is scheduled to report fourth-quarter 2007 earnings (ending December) at 8:30 a.m. EST on Tuesday, Jan. 15. The current consensus estimate calls for a fully diluted quarterly loss of $1.00 per share (down 197% vs. earnings for the same quarter last year) on ongoing revenue of $10.67 billion (down 55% vs. same quarter last year).

Citigroup's historic record relative to expectations has been mixed, but that is irrelevant. Earnings expectations have imploded over the last three months, reflecting the ongoing horrific mortgage market fallout. Due to Citi's high-profile difficulties -- including today's rumors of pending new writedowns totaling up to $20 billion, 24,000 job reductions and a dividend reduction -- a negative earnings surprise is quite possible.

In third quarter 2007, Citigroup matched severely depressed expectations, posting a 58% year-over-year EPS decline (excluding extraordinary items). Continuing operations' revenue growth, which includes global consumer and wealth management, was up 6% but was more than offset by a 22% jump in expenses.

Citigroup's target Tier 1 capital ratio is 7.5%, and its tangible-common-equity-to-risk-weighted-managed-assets ratio is 6.5% vs. Sept. 30 levels of 7.3% and 5.9%. Accordingly, Citi is now focused on repairing its capital base (for instance, see its recent $7.5 billion injection from the Abu Dhabi Investment Authority). An additional $15 billion capital injection is also potentially needed, quite likely sourced in China and the Middle East.

As such, near-term organic and acquisition-based growth could well suffer, despite continued expansion internationally as well as within wealth management. Profit recovery, under Citigroup's new CEO, Vikram Pandit, will therefore be dependent upon expense reduction.

Following the 40% cliffdive in autumn 2007, Citigroup shares now sit just 7% above the $27 bottom band of an eight-year wide trading range. ($55 is the top of the range.) Given the pending rumored "kitchen sink" earnings announcement, the company's new CEO may be about to make his mark just as investors have given up hope (as evidenced by the ugly on-balance volume). Today's 1% price rise, within a broad market gain, gives some credence to the theory.

Of note, moving average convergence/divergence and relative strength have posted higher highs amid continuing price compression. Citigroup is also currently selling at a 25% discount vs. its industry, appropriately reflecting the company's inferior prospects.

An investor could be forgiven for beginning to scale into Citigroup as shares try to find a base near long-term support. Caution is also warranted, however, given secular housing troubles. Should support fail, next support isn't until $24 and $15 (down 21% and 48%, respectively).

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At the time of publication, White had no positions in the stocks mentioned.