Citigroup (C) is an American multinational financial services firm led by Jane Fraser. The bank is one of the so called “Big 5” in America and is certainly a stock that’s been part of many investors’ conversations lately. I am bullish on the stock.
Earnings
It was reported last week that Citigroup missed earnings per share expectations during its third quarter by $0.18. This came as a great surprise to many, as the big banks were all expected to crush estimates after the debt market’s recovery towards the end of 2021.
According to the company’s report, the decreases in earnings were down due to increasing expenses amounted to a staggering $13.5 billion.
The firm’s expenses grew by 15% quarter-over-quarter and 18% year-over-year, excluding any costs bound to Asian divestments.
Furthermore, Citi’s business transformation also rose by 8% year-over-year as the firm’s earning towards a fee-based business and away from retail banking.
The After Effects
Fortunetely for Citigroup the market is forward-looking and the expenses incurred during the previous quarter are mainly abnormal as the heap of it raised from restructuring costs.
I expect the banking space to have its best year in a long time because of the magnitude of the debt market’s recovery. Interest rates were dropped out of the blue when COVID-19 restrictions started, but it may well be that they need to get raised more than the four times anticipated this year to smooth inflation. This will provide strength to Citi’s loan portfolio, which makes up for approximately 56% of the bank’s revenue mix.
Another aspect to consider is the slack in the equity markets. GDP is anticipated to grow by 3.8% this year and the S&P’s earnings yield has improved by more than 25% since the first quarter in 2021, meaning that we could witness another period of high demand for IPOs and asset management activities from Citi’s current and prospective customer.
Valuation
Citi stock is still massively undervalued relative to its five-year average. This is understandable to me, considering the cyclical nature of banking stocks with their tendency to oscillate heavily around their average valuation ratios.
Citi’s price-to-earnings ratio is trading 38.6% below its five-year average, and its price-to-book is also trading at a discount worth 11.6%.
The price-to-earnings is a good indication of the market’s perception, whereas the price-to-book value is a metric we often use to measure the market’s value versus fair value.
Both show that the stock is a bargain at the moment, leading me to conclude that we’re looking at a severely undervalued stock here.
Wall Street’s Take
Turning to Wall Street, Citi has a Moderate Buy consensus rating, based on nine Buys, and seven Holds assigned in the past year. The average Citi price target of $77.45 implies 19.2% upside potential.
Concluding Thoughts
Citigroup’s expenses during the past quarter aren’t anything to panic about as they’re primarily abnormal expenses. The stock could reap the benefits of the cyclical upturn in financial stocks.
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