After a 21% rise in the stock price in the last month, bringing it to the point where it is up 47% from a year ago, Citigroup Inc. (NYSE:C) ended up showing strong returns in 2012. Going into 2013, there is still a value case to be made in terms of some common value metrics. The bank still trades at a sizable discount to the book value of its equity at a P/B of 0.7; while we don’t think that Citi’s assets are particularly reliable, and the company remains exposed to conditions in Europe, this may be too low a ratio. Consensus 2013 earnings imply a current-year P/E of only 9, and the five-year PEG ratio comes out to 1. So if Citigroup Inc. hits its earnings targets it would likely be undervalued; even if it misses slightly the current price would be about right. A number of value investors have been taking notice of the stock’s value, and at the end of the third quarter Citi was one of the most popular stocks among hedge funds (see the ten most popular stocks). With the breadth of hedge fund interest generally not changing dramatically, we’d guess that it’s still one of the most popular stocks about three months later.
Billionaire David Tepper was one of the hedge fund managers who liked Citi in the third quarter of 2012, increasing Appaloosa Management’s stake by 10% to a total of over 10 million shares. Citigroup Inc. was one of the largest holdings in Appaloosa’s portfolio (find more of Tepper's favorite stocks). Moore Global, which is managed by billionaire Louis Bacon, initiated a position in Citigroup during the quarter (check out Bacon's stock picks) and large hedge fund D.E. Shaw was also buying shares of the bank (research more stocks that D.E. Shaw likes).
Citigroup’s revenue was down sharply in the third quarter of 2012 compared to the same period in the previous year; while net interest revenue declined only slightly non-interest revenue dropped 77%. As a result net income for the quarter came in much lower. Book value per share increased 5%, so while most of the increase in the share price has come from a higher P/B ratio there has been some improvement on the balance sheet as well.
Two other large banks currently trading at discounts to book value are Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM). The P/B is at least close to 1 in JPMorgan Chase’s case, but Bank of America is valued about 40% lower than book by the market. That bank does have a reputation for being too much of a financial supermarket, and its P/E for 2013 is 12; with net income down even more there than at Citi we think that we would pass. JPMorgan Chase’s P/E is 9, so it actually matches Citi on that metric and has only a slightly higher P/B ratio. We would consider JPMorgan Chase to be a more stable bank, and in its most recent quarter revenue and earnings were up from a year earlier, so we would say that it is a better buy.
Wells Fargo & Company (NYSE:WFC) and HSBC Holdings plc (NYSE:HBC), meanwhile, are valued at premiums to book value at P/B ratios of 1.3 and 1.2 respectively. In the case of Wells Fargo, this makes sense as that bank makes very good use of its assets; when we look at earnings, the forward P/E is only 10 and we think that the bank can easily justify its valuation. We certainly think that it’s worth paying more to own Wells Fargo than Citigroup. HSBC’s recent financial performance and P/E multiples look quite a bit like Citi’s, and we’re not sure why its assets merit such a high valuation. We think it should be avoided as well.
Citigroup seems like it could be a good value investment, but we’d advise potential buyers to at least look at JPMorgan Chase and Wells Fargo first. JPMorgan Chase is priced competitively, but we think it’s in a much better business position than Citi; Wells Fargo’s assets are expensive but the gap narrows considerably when we look at earnings and the bank’s safer reputation justifies its premium to Citigroup.