Monday, May 24, 2010

Entry point is critical, if you're gonna buy Citigroup shares (C)

Of course the "entry point" is critical.  That might sound overly simple, but it's overly important with Citigroup (C).

Citi shares are +2.5% this morning, on a Goldman Sachs upgrade to Buy.  Goldman took a new look at the financials after they've significantly underperformed the broad market.  They like the super-banks like Citi based on a "normalized PE" analysis, with underlying earnings arrived at based on a "normalized" return on equity.  The Goldman normalized EPS for Citi appears to be about 46cents, which is inline with what I'd expect for Citi in 2011.  One could make the case that Goldman is using closer to "peak" earnings figures, rather than "normalized."

Investors would be better off by looking a little deeper than an assumed return on equity, because as we've seen with banks, equity is a moving target.  Below is a simpler look at interest revenue and non-interest revenue at Citi, as well as the operating expenses required to get there.  To be clear, I DO NOT own these shares, but rather am laying out potential earnings (and thus possible price targets).  Buying today gives investors upside of about 105%, versus 58% upside had you bought weeks ago at $5.00 per share.  The scenario below might assume a higher loss provision than is warranted, but offsetting that is generous assumptions about operating expenses.  Even if Citi fires on all cylinders and generates $20+ billion in net income, stockholders are now splitting that net income with 28billion other stockholders, versus 5billion a few years back, thanks to the dilution from new capital.   So, the limited earnings per share power make it a very different investment at $3.75 per share than it is at $5.00.

Copyright 2010 AlphaNinja

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