- Citigroup trades at only 60% of tangible book value per share, despite being profitable throughout this major recession.
- Citigroup should be fully reserved to deal with future loan losses from the pandemic/lockdown.
- At roughly 6 times trough level earnings power, Citigroup has very little downside and well over 50% upside from current levels.
Benjamin Graham defined investing as “an operation in which, upon thorough analysis, promises safety of principal and a satisfactory return.” 2020 has certainly not been the year for value investors, but the logic behind Graham’s words are timeless. The common stock of Citigroup (C) offers an immensely compelling opportunity at current prices, offering well over 50% upside potential over the next 18 months, plus a very solid dividend yield. The big bank has weathered an unexpected and major storm and is poised to emerge in an extraordinarily strong financial condition.
Citigroup’s earnings conference call (its CEO Mike Corbat on Q3 2020 Results - Earnings Call Transcript) was a perfect reminder of the groupthink in the bank analyst community. The main topic was the consent order Citigroup agreed to with the government that included a $400MM fine and will lead to additional expenses as the company restructures and modernizes its technology and data infrastructure. This has been an issue for decades, as Citigroup was the rollup of many different businesses that all relied on their own separate technology. Clearly, it would have been better had the company moved faster on these fronts, but the accidental $900MM payment to Revlon (NYSE:REV) bondholders was the unfortunate catalyst for this formalized process.
The analyst community seemed very perturbed and wanted management to identify exactly what the additional costs were, which Citi could not do, because it is still outlining the strategy with regulators and it has a new CEO taking over next year who will be part of the decision-making process. Technology spending is not the same as simply paying a fine. There is a return on investment that comes with these expenditures. You digitalize and you eliminate manual processes. It is spending that Citigroup would have had to do at some point and I am sure management will be able to offset at least a portion of the new expenditures with cost savings measures. It was just strange because it was obvious why the company couldn’t put a specific dollar amount on it, but every question revolved around this, and realistically, you are probably talking about a few billion dollars expense over a couple of years which as I said before, will have an ROI associated with it. I also thought some of the criticism leveled at exiting CEO Michael Corbat was unfair. He did an excellent job improving returns over his tenure, and while the current stock price is very low, it is not just because of something that Citi did, but financials are in a bear market due to the lockdown/pandemic. He handled the petulance of Mike Mayo with class, but it was cringeworthy to listen to.
