Is It Too Late to Buy Citigroup?

Citigroup Inc. (NYSE:C) investors don’t seem concerned by the departure of Vikram Pandit, with the stock up 10% since the beginning of October, and up 27% for the year. Citigroup’s 10-Q for the third quarter of 2012 showed a decline in non-interest revenue compared to the same period in 2011; with net interest revenue and operating expenses slightly down, earnings fell to under $500 million while in Q3 2011 it had earned $3.8 billion. The first three quarters of the year show a similar pattern, as over that time revenue has been down (led by non-interest revenue) and this has pulled net income lower.

APPALOOSA MANAGEMENT LP

Citigroup Inc. has been a good value stock so far this year, and based on book value it still looks cheap. The company’s P/B ratio is 0.6, showing that the stock still trades at a sizable discount relative to internal valuations of Citi’s assets. Some of this discount is because the industry as a whole is often seeing P/Bs less than 1; some is because Citi’s European assets have considerable exposure to macro weakness; some is because the market believes that the bank has too many disparate assets to effectively manage. Wall Street analysts also think that it is a good value in terms of its future earnings: the forward P/E is 8, and the five-year PEG ratio is 0.7. Again, the banking industry is often seeing low earnings multiples, but value investors might be considering Citi if they don’t own it already.

A number of hedge funds tracked in our database of 13F filings sold out of Citi during the second quarter of the year, but enough stuck with the bank that it made our rankings of the ten most popular stocks among hedge funds (see the full rankings). Billionaire David Tepper’s Appaloosa Management was happy to pick up shares, increasing its stake by 52% to nearly 9.3 million shares of Citigroup Inc. and making that one of the fund’s top three 13F positions. Find more stock picks from billionaire David Tepper. D.E. Shaw, managed by billionaire David Shaw, more than doubled the size of its own position to 1.8 million shares (research more stocks that D.E. Shaw bought).

Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) are two other megabanks which trade at discounts to book value. JPMorgan Chase’s P/B is 0.8 and Bank of America’s, at 0.5, represents an even greater discount than at Citi. Both of these banks have also been beating the market recently- Bank of America, in fact, is up 56% in the last year. That company’s business has also been struggling, with earnings much lower last quarter than a year earlier, and it trades at 10 times forward earnings estimates; we think that we’d avoid it. JPMorgan Chase, meanwhile, reported growth in both revenue and earnings and its forward P/E is 8. So it looks like a slightly more expensive stock than Citi, but we think that it’s a safer bank and probably a better investment as well.

We can also compare Citi to Wells Fargo & Company (NYSE:WFC) and HSBC Holdings plc (NYSE:HBC). Both of these banks trade higher than their book values, as Wells Fargo’s P/B is 1.2 and HSBC’s is 1.1. HSBC is in the same category as Citi and Bank of America in terms of recent performance, with earnings down 52% last quarter from the third quarter of 2011, and at 8 times consensus earnings for next year we think that we’d rather own Citi or JPM. Wells Fargo is generally considered by investors to be a safe bank, explaining its relatively high P/B; at only 9 times forward earnings estimates and with moderate growth recently, we think that it might be becoming a good stock to look at if an investor can get around that premium on the book value.

Citi still looks like a potential value stock. However, JPMorgan Chase and possibly Wells Fargo have been doing better recently and are generally perceived to be safer banks; they are also priced about even with Citi in terms of their earnings. The bank isn’t a short, but we think that those peers might be better buys.

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