Citigroup's ( C) stock has spent 2009 like an old carnival game: Every time it pops above $4, it is beaten back into its hole again. Shares of the big financial company, which were falling 13 cents to $2.66 Tuesday, have spent much of the past four months hovering in the $3-range. The stock fell from more than $7 a share at the start of the year to a closing low of $1.02 on March 5, before recovering somewhat along with the wider market. The stock has risen above $4 only four times since mid-January, getting quickly knocked back into its familiar $3 territory each time.
Since equities hit their 2009 lows in early March, most other financial institutions have fared much better. JPMorgan Chase ( JPM) shares, which slumped to $15.88 on March 6, have risen back into the mid-$30's in recent weeks. Even Bank of America ( BAC), which fell to $3.14 on March 6, has seen its shares rebound to roughly $12 a share recently, despite continued pressure from the federal government to raise money and revamp its board of directors. Even on Friday, when Citi reported a surprise second-quarter profit of $4.27 billion, or 49 cents a share, the stock closed down a penny to $3.02. Analysts had expected Citi, which has been bailed out by the U.S. government twice, to post a loss for the three months ending June 30 and indeed the company would have, if not for its early completion of the joint venture between Smith Barney and Morgan Stanley ( MS), resulting in an $11.1 billion pre-tax gain ($6.7 billion after taxes).
So why is Citi's stock unable to stay above $4? The fact of the matter is, Citi's businesses are still struggling -- and more so than its large bank counterparts. "
I t is a mess," says Richard Bove, an analyst at Rochdale Securities. "This is the most mismanaged bank I have ever seen ... due to the fact that not only do they keep changing their CEOs and CFOs, but every time they change someone, they change the strategy. The funding of the company, which is rich, has always been fritted away on bad investments, bad initiatives and that has costs, but also you keep changing personnel because of it. You can't run a company that way and that's the way they run Citigroup." Given that other large banks including JPMorgan Chase, Goldman Sachs ( GS) and US Bancorp ( USB) have been able to repurchase the preferred stakes the government bought in their companies through the Troubled Asset Relief Program during the second quarter, Citi is set to make the U.S. government an even bigger stakeholder at the end of the week. CEO Vikram Pandit, despite saying that Citi is starting to see signs of improvement in its consumer loan book "which of course also has implications for future additions to reserves," also said during an analyst call on Friday that the company's two major challenges right now are mortgage and credit card losses. "In our consumer businesses, the story is very simple," Pandit said on the call. "Cards and mortgage are what we need to work through and we are very focused on this."
The company's attempts to reshape itself during the worst financial crisis since the Great Depression through a deleveraging of risk, expense cuts, restructuring of core businesses and management changes, has taken a toll on its revenue. David Trone, an analyst at Fox Pitt Kelton Cochran Caronia Waller said that while early signs of consumer losses could be nearing a peak, the "revenue franchise has clearly been impaired, under the firestorm of criticism/pressure from politicians and journalists, which has driven away top talent and distracted those that remain," he writes in a note. Guillermo Kopp, an analyst at TowerGroup, says the company needs to undergo a more critical analysis of its business lines and markets, such as North America, where consumer banking performance in its Citicorp unit "hasn't been stellar." Citi should allocate resources to areas that where it is still growing successfully, such as global transaction services, he says. "I'm not sure that Citicorp needs to be all things to all people," Kopp says. "It has gotten too complicated to be kept together." Bove adds that there are also technical factors are hampering the stock from rising, referring to the arbitrage trade occurring for much of this year where institutional investors and hedge funds have taken long positions on Citi's preferred stock, while shorting the common stock. Once Citi's exchange of common shares with preferred shareholders is completed, expected by July 24, "the stock will pop," Bove says. That's because those investors that are involved in the arbitrage trade will have to unwind their short positions in the common stock once Citi converts the preferred shares.
The exchange offer is expected to result in as many as 17.4 billion new shares issued making Citi's shares outstanding totaling roughly 23 billion shares. Still, Bove currently has a buy rating on the stock, saying there is value to be had in Citi's stock simply because the government "refuses to let it fail." If the government refuses let the company fail, "they're going to have to continue to divest businesses which are not performing well because the government will not tolerate any expansion until
the company is whittled down to the businesses which are working," he says. Alan Farley, who writes the " Daily Swing Trade" newsletter for TheStreet.com's sister Web site RealMoney.com, says the "only thing is that is going to help this stock is when they say 'We've gotten to the bottom of our losses,' and the toxic assets have been dealt with." Once Citi gives an absolute final figure, the stock "goes straight up," he says, who owns shares of Citi.