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'Stay Long' on Citigroup, says Bank of America

NEW YORK (TheStreet) -- Even though Citigroup's (C - Get Report) stock is up 90% since the end of 2011, Bank of America Merrill Lynch analyst Erika Najarian expects the stock to "almost double" the performance of the S&P 500 in 2014.

Citigroup's shares closed at $50.71 Wednesday, rising 28% this year and "underperforming" the 30% return of the KBW Bank Index (I:BKX).  The shares trade for 0.9 times tangible book value, for 9.4 times the consensus 2014 Earnings estimate of $5.41, among analysts polled by Thomson Reuters, and for 8.5 times the consensus 2015 EPS estimate of $5.95.

That's the lowest valuation to consensus 2015 EPS among the 24 components of the KBW Bank Index.

"Despite recent underperformance and sell-side downgrades, we think C remains one of the most compelling ideas among large-cap financials heading into 2014," Najarian wrote in a client note on Thursday.

The analyst reiterated her "buy" rating for Citigroup and raised her price target for the shares to $61 from $58, implying 20% upside potential over the next 12 months.

While providing plenty of reasons for her confidence in Citigroup, Najarian wrote, "if we could boil it down to one line, it is this: At this mid-stage of recovery, investors should own the US-based, globally exposed bank stock trading below tangible book that has plenty of capital and is also a 'self help' story."

Citigroup derives a far greater share of revenue and profit from business outside the United States than any of its large-cap U.S. competitors.  The company reported that for the first three quarters of 2013, 57% of its revenue and 62% of its profit -- excluding credit and debit valuation adjustments -- came from outside the U.S.

The company continues on its long-term course "good bank/bad bank" recovery strategy, allowing nonperforming and non-core assets to wind down within the Citi Holdings subsidiary.  Citi Holdings had $122 billion in assets as of Sept. 30, declining 29% from a year earlier and 59% from two years earlier, representing just 6% of Citigroup's total assets.

According to Najarian, Citigroup is "to post the most incremental change in capital payout this year, which we project to include a dividend increase."  The analyst is referring to the next round of Federal Reserve stress tests and capital plan reviews, which will take place in March of next year. 

"Based on our own bottoms up projections, C would have no issues paying out $9bn in capital [thorugh dividends and share buybacks] while exceeding all the current capital hurdles outlined in next year's test," Najarian wrote.

She estimates Citigroup's earnings will improve from $4.62 a share this year to $5.65 in 2014 and $6.15 in 2015.

Citigroup's shares were down slighty in late morning trading, to $50.60.

C ChartC data by YCharts

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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