Can Citigroup Reach $60?

NEW YORK (TheStreet) -- Trading at Friday's close of $52.21, shares of Citigroup (C) are up close to 110% since the stock reached a low of $25.15 in July 2012. Shares closed Monday at $51.64.

Investors have begun to ask, is it time to take profits or do the shares have more legs to run up to $60? I don't disagree there are still plenty of risks here.

While trying to repair its damaged brand in the U.S., management has been working to repair Citigroup's global presence, which has come under attack by JPMorgan Chase ( JPM). Not to mention the fact that Citigroup has been losing share to both Wells Fargo ( WFC) and Bank of America ( BAC) in overall loan growth during a period where Citigroup has recently installed Michael Corbat as CEO.

Even so, as with Wells Fargo and Bank of America, I've remained bullish on Citi's revival for quite some time. There were no reasons to waver. Plus, the Street can no longer discount the pace of Citi's recovery, which is well ahead of management's schedule.

Now, with the housing recovery in full swing, I don't see any reason to change my outlook on the stock, especially as the once-sluggish interest rate environment is suddenly beginning to improve. If Citi's recent earnings results serve as indication, there's nothing standing in the way of this stock from going higher.

Heading into the quarter, the Street was looking for $1.17 in earning per share on revenue of $19.68 billion, which would have represented year-over-year EPS growth of 17% and 6% growth on revenue. These expectations were too high, at least I thought. Citigroup, which for the quarter posted a 42% increase in net income, had other ideas. Revenue surged 11%, almost doubling some analysts' estimates.

Even more impressive is that even when scrutinizing the results for things like the debt and credit valuation adjustments, Citigroup still beat earnings-per-share estimates by 8 cents, which represents 25% year over year growth. I'm not suggesting that Citi is now free and clear from the risks that I've mentioned above. What is clear, though, is that management has figured out ways to create value by focusing on credit-cost reduction and growing income from banking fees.

Fee income, which was up 19% in the quarter, is once again a significant driver of Citigroup's profits, helped by better-than-expected trading revenue. What this means is that, despite the weakness that remain in Citi's core banking operation, Citi, along with JPMorgan, is once again near the top in terms of investment banking.

Equally impressive is that despite the 10-basis-point sequential decline in net interest margin (NIM), the bank still benefited from an improvement in average earning assets, which contributed to a 3% year-over-year improvement in net interest income.

In the April quarter, management issued some warnings to investors and talked about working through "legacy issues," many of which have impacted upon Citigroup's ability to move forward from the height of the credit crisis. I've said it recently: I think management underestimated their ability to right this ship in the quicker-than-expected pace that they have.

As I've said before, Citigroup is not out of the woods yet. I believe the challenges that still remain in consumer banking (its largest business) serve as evidence that there is work still left to do. But the bank is navigating the trough pretty well, helped (in part) by its diligent operating expenses control - a strategy that's also working for Wells Fargo.

To the extent that management can continue to balance expenses and grow income fees, it makes a strong argument for better-than expected performance improvements in return on equity (ROE), which is currently at 5.22%.

With the stock trading today at around $52 per share, 8% ROE would place the stock at around $56 per share, which still seems too conservative. I believe Citi can reach $60 per share by the end of the year, which assumes ROE of roughly 11.5%, which is 2% lower than Wells Fargo's ROE of 13.5%

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst ¿ bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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