
Citi Stock Eyes $5 (And More)
Updated to include Citi closing price, volume.
NEW YORK (
) -- Wall Street has gotten ever more bullish on
Citigroup
(C) - Get Report
shares in recent months, with analysts setting long-term price targets of more than $5.
This time they may be correct.
It has been more than seven months since Citi shares last breached $5, and more than 15 months since they closed at more than that amount. The stock hasn't traded consistently at more than $5 for about two years.
Citi shares closed at $4.62 Tuesday, up 3.82%. More than 3.2 billion Citi shares traded, representing nearly half of the
New York Stock Exchange's
total volume of 6.9 billion. The stock surge came shortly after the Treasury Department announced it had priced and begun to exit its final tranche of Citi stock.
During the height of the financial crisis in 2008, Citi shares crashed from around $30 to less than $7 and eventually traded for less than $1 as the firm appeared at the brink of collapse. The federal government prevented such a catastrophe by investing $45 billion into the bank.
The tsunami of taxpayer funds has diluted private shareholders and put a lid on stock performance for quite some time. But as the Treasury continues to unwind that stake -- which now stands at 12% -- the same factor cited as an overhang has kept Citi shares relatively resilient. While other big bank stocks are down anywhere from 5% to 25% since the start of the year, Citi is up more than 33%. Its stock didn't decline as much during the selloff between mid-April and late-August and it has been moving incrementally higher since then.
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Last week, bulls rushed back into the stock market, with a particular focus on cheap bank stocks. The reasoning: Treasury yields are too depressed, sovereign bonds are too scary and battered financial stocks represent something of a middle ground in the risk-reward spectrum. Even
Bank of America
(BAC) - Get Report
, which hit a new 52-week low of $10.91 on Tuesday over speculation about a Wikileaks scandal, was up nearly 9% from there by Friday's close.
Now that the government is exiting Citigroup, there's a good chance 2011 could see sustained upside in the stock -- particularly as the bank begins executing on a growth strategy abroad while getting rid of most of its "bad bank" U.S. assets. Those asset sales, the argument goes, will generate more capital to put toward higher-yielding investments abroad and the restoration of Citi's dividend, which was extinguished in 2008.
"There is good reason to believe that Citi Holdings can be wound down without undue further damage to shareholders and that the remaining businesses in Citicorp are worth over $5 per share," Oppenheimer's Chris Kotowski said in a report last week..
After meeting with management and drilling into Citi's operational and valuation data, Kotowski reiterated an outperform rating with a price target of $5.20.
He believes management -- aware that shareholders have been burned too often and wary of making promises it can't keep -- has been "deliberately circumspect" regarding strategy, execution and growth targets.
"This management team is bent on recouping a credibility deficit that the company had built up over the years," says Kotowski.
CEO Vikram Pandit and CFO John Gerspach told Kotowski that they are focused on the diversified business model championed by John Reed, who oversaw the transformation of Citibank into Citigroup before being pushed out by Sandy Weill. Whether invoking the name of Reed is good or bad depends on whom you ask, but management is certainly focused on the depth and breadth of Citi's international operations. The bank is far beyond its peers in that regard, especially in high-growth, emerging markets.
One of the key factors holding back Citi's shares this year -- apart from the government stake -- has been its bad bank, known as Citi Holdings. Investors have had a hard time figuring out when Citi will be done getting rid of those assets and what the bank will look like when they're gone.
But Kotowski and other analysts say they've gotten more clarity into the business, and see value of more than $5 per share. Citi is expected to have reduced Citi Holdings by 25% to 30% by year-end, including the sale of $32 billion worth of student-loan assets scheduled to close this month.
Divestitures are expected to slow next year because the remaining businesses -- largely related to subprime lending in the U.S. -- could be hard to sell. Citi's other big asset to divest is its remaining stake in its brokerage joint venture with
Morgan Stanley
(MS) - Get Report
, but Citi won't see those funds till 2012 at the earliest, when Morgan Stanley will begin buying out its partner's stake.
"If our rating on Citigroup shares is wrong, we believe it most likely would stem from a massive release of capital from the winding-down of Citi Holdings," says David Hilder, an analyst with Susquehanna International Group and one of nine analysts who rates the stock a hold (vs. 15 who rate it a buy).
Hilder is part of the skeptical set that Citi management has yet to fully woo. He thinks management's targets are a little too Pollyanna to buy into just yet.
Citi is aiming for a return on assets of 1.25% to 1.5% and earnings per share of 60 cents to 75 cents in a normalized environment, with a balance sheet of $1.5 trillion or more. (In Hilder's recent meeting with management, even Gerspach acknowledged that the smaller, more nimble Citicorp business didn't produce that level of return in 1995 to 1997 before its merger with
Travelers Corp.
(TRV) - Get Report
)
Gerspach insisted that Citi will be able to do this by being selective in its securities and banking businesses, targeting high-growth markets abroad, high-end customers at home and limiting business that delivers less than 1% return on assets. Hilder isn't buying it, though: "Citi has yet to prove this can be achieved," he asserts.
Even if management didn't win over Hilder completely, he still seemed charmed. He noted that the company is on the right track and plans to start returning capital to shareholders as soon as 2012 -- the same time frame
Bank of America management is targeting.
"It is clear that Citigroup is stabilizing as a business and as an organization after several years of turmoil and is focused on a clear strategy," Hilder says.
Top Citi executives have had more success with other Wall Street analysts after recent meetings. More than half the analysts covering Citi rate its shares a buy, with an average price target of $5.33, according to
Bloomberg
. Whether Citi, the company, can achieve its long-term objectives seems to have little to do with Citi, the stock's, near-term price performance. By the time Hilder's report hit the market on Thursday, Citi's shares already has surpassed his $4.25 price target, having closed at $4.30 the previous day and adding as much as 15 cents more during the session.
Much of last week's performance could be attributed to an uncharacteristically bullish note on the financial sector from Goldman Sachs analyst Richard Ramsden.
Ramsden has Citi on his conviction buy list and believes the improved economic outlook will help Citi's consumer franchise as it focuses on growth in emerging markets. He also believes that Citi's recent valuations at less than tangible book value reflect a "significantly lower" value than Citi will be able to achieve once its postcrisis makeover is complete.
"With the government's stake (believed to be less than 10% at this point) expected to be disposed of by some point in late 1Q11, we believe a significant overhang will be removed," said Ramsden. "We believe Citi's core earnings power (approximately $20 billion) and excess capital generation from Citi Holdings (21% of assets, 37% of risk-weighted assets) supports our $5.50, 12-month price target, which is based on discounted earnings estimates."
Deutsche Bank's Matt O'Connor is one of the most bullish, rating Citi the top buy among the big banks he covers. He reiterated his $5.50 price target after meeting with Pandit and Gerspach recently, citing the same factors as others: the continued run-off of troubled assets, further improvement in credit quality and capital metrics, and "greater appreciation" of Citi's overseas businesses.
"There's still upside to the Citi story," says O'Connor, "in both the near and longer term."
-- Written by Lauren Tara LaCapra in New York
.
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