http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_C/threadview?m=tm&bn=2895&tid=836495&mid=836495&tof=4&rt=2&frt=4&off=1
Currently, according to earnings estimates Citigroup is not undervalued compared to BAC, WFC, and JPM. If you take the FY 2010 earnings estimate (based on Thomson Reuters) you will see that the forward P/E for all 4 banks is between 10.5-12. However, only Citi is assumed to have ridiculously small earnings in 2010 (0.27 a share) .
Lets cut to the chase - pros and cons for 2Q earnings:
PROS:
1) The major plus for upside Citi earnings and for all other banks is the M2M rule suspension, especially for Citi, without it we would obviously incur losses in EPS in the entire FY 2009, no doubt about it. However, I do believe that suspending FAS 157 was a good idea, after all we have not used that rule for 70 years, why suddenly they decided to reinstate it in 2007, only to cause humongous panic later on in 2008.
2) Upward Sloping Treasury Yield Curve :
Larry Kudlow pointed out recently that "the upward-sloped yield curve is the real bailout for the banking system." The yield curve is so favorable for all banks, this is just insanely easy money for all banks. The large profits for all big banks in the first quarter 2009 are a direct result of the upward sloping yield curve and the increasing interest spread in the first quarter. Guess what the spread continued to widen in the second quarter even further!
3) Private equity secondary market offerings: May 2009 was a record month for secondaries offerings and Citi was very active on that market.
4) Overseas markets are in pretty good shape. Their revenue should be rising really quickly! In addition, overseas income will get a nice boost due to currency fluctuations.
5) Huge reduction in operating expenses: Pandit iterated again that they have reduced expenses by 25% - in the past several months Citi has cut its expenses by almost $4 billion per quarter !!! If Citi can keep or reduce the last quarter number of $12 bill. expenses, this will be tremendous.
6) Credit card losses seem to have stabilized. Citi was the only one of the big banks that had the same default rate on credit cards as April ( as opposed to BAC for example), delinquencies rates fell for second month in a row(remember that delinquencies are directly correlated with the real credit losses, not the default rates). In addition, Citi has a very small exposure to commercial real estate (only 2.5% out of the estimated stress test losses).
7) Nikko Cordial and Smith Barney are still generating revenue for Citigroup in this quarter. They should show pretty good numbers given the fact that the market was so bullish in April through mid-May.
8) Citi have reduced tremendously their risk exposure – look at the 1Q data.
Note: I think there are no savings from dividends this quarter.
CONS:
1) Citi will have big credit LOSSES this quarter , and they are the big unknown ! Hopefully the suspension of FAS 157 will help ...
2) The major problem is that we do not know what is the real earning power for Citi, their revenues got a huge boost from the "illegal" fixed-income, one-time trading of the AIG CDS, which improved the earnings by at least $2.5B in 1Q(read the earnings). Obviously all banks took advantage of the easy money offered by the AIG-feds, so we do not know without that one time boost how the earnings will look like. That is why Citi stock fall so sharply after 1Q earnings (4.40 down to 2.80 if I am not mistaken), investors needed time to read the data and realize that the absolutely surprising profit came from one-time AIG scam.
3) Citi is loosing talent due to the govt. harsh pay regulations, in addition they have reduced enormously their risk exposure, so I do not see how they can come up with any risky investments that can yield large profits. We might not see the same performance in the segments : Institutional Clients Group and Wealth Management, and these two are absolutely critical for sustained increase in the net revenue.
Re: 2Q Earnings Preview 20-Jun-09 06:59 pm Summary: The only way Citi can show improved earnings is by cutting expenses, obviously their revenues are not going to be the major moving factor due to the cuts, lay offs, brain drain, selling assets, etc...however the emerging markets can help a bit to the net revenue. But again, if Citi can keep or even lower the last quarter number of $12 bill. expenses, they will be just fine, that is the key in my opinion. If you run the numbers, all analyst estimates for FY 2010 earnings (revenues) are based exactly on the adverse scenario from the stress test. So if the credit losses are flat or even less than the previous quarter then this will lead to a huge boost, since the analysts will not extrapolate with the worst-case scenario anymore. On the other hand, the first stage of the conversion ends July 30 - just 2 weeks after the earnings release. The end of the arbitrage is important, because I estimate that anywhere between $10-15B are involved in the arb play. All these funds will be released, then what the hedge funds are going to do? Are they just going to leave the C trade??? Next move by the hedge funds will be important for the short term trend, if the earnings are good (show some upside surprise), they might invest in C , while if they are terrible or in-line with estimates then they will short and we can go back to 2.00-3.00 range. This is just my opinion, my gut feeling is that Citi will show positive earnings, not mind-blowing, but still something around $1.5-2B this 2Q. If we see earnings of that order, I believe the PPS will trade in the 4-4.50 range in August-September.
lamgol, see if you can guess who I am from this post. Everyone else, forgive me if this post seems a bit disjointed, it was in response to another question on another forum:
There is $58 billion backing the new 16.5 billion shares, about $3.51/
share average. I say average because government and private preferred
shareholders will get a better deal than public preferred
shareholders. When conversion happens, it is going to lift the price
up, not drag it down (I'm talking long term here, there will always be
short term fluctuations).
Now, some on this board and in the media have said that this
conversion is effectively creating shares for somewhere in the $2
range, which is sort of correct. There are some preferred series of C
that trade for significantly less than their $25 par value. Let's say
that some trade for $15. Since each $25 par value preferred share,
which trades for $15, is going to convert to 7.3 common shares,
$15/7.3 = $2.05/share. 7.3 is the conversion ratio for government and
private preferred shares. Government and private preferred share
holders will get a better for them (worse for us) 7.3 ratio, so I use
7.3 as the worse of the 2 ratios. The ratio for public preferred
shares is 6.8, which creates common shares at $2.20/share.
These are the shares that are really worth $3.51 after conversion
(I'll explain in a minute). So that's an immediate 42% and 37% gain
for gov/private and public preferred shareholders, respectively, which
is why arbs and other smaller players bought the preferred so heavily.
Now, immediately shorters and people that firmly hate C point this out
and state, "Haha, your new stock price should be $2.05/share, this
will dilute you real bad!" No, it really won't. They conveniently
ignored the other $10 missing from the preferred stock (Par minus
trade values). That $10 goes directly to Citibank's common equity
pool, and so does the $15, but they have to trade this for stock. The
ENTIRE par value goes to C's common equity.
You're not getting diluted, the value of your investment will more or
less stay the same, but you are getting your stake reduced. This is a
point of contention that is very heavily disputed. It shouldn't be,
but the average person on C forums has the IQ of a brick. If you add 3 new common shares of C at $3.51 for every
current common share of C at $3.13 (today's closing price), your
average price is $3.41. This stock is already undervalued by at least
$0.28 just by going with this simple math.
Furthermore, only $20 billion of the public preferred shares are
getting immediately converted to common stock, which will roughly
double the amount of outstanding shares to 11.8 billion (up from 5.5
billion). The government and private preferred shares are being
converted into an interim security which will not convert to common
stock until September. Some people feel that there is an outside
chance that these interim securities will not convert to common stock,
but it is likely that they will. Also, shorters (and to a lesser extent,arbs) are going to have to buy
back 1.2 billion shares that they shorted. There is going to be a big
short term boost in demand at the end of July/beginning of August from
short covering. Plus, it is more expensive for shorts to cover when
there's less shares in a company.
Now, your are correct in saying that the price/book ratio will be
nearer to 1 after conversion. Outside assessments of tangible book
value of C have it at around $4/share, so after conversion, C should
be closer to 1 than 0.25. P/B ratios should really be much higher than
1, they should be between 2-4, minimum. That means that C should be
trading in the $8-16 range.
Currently, according to earnings estimates Citigroup is not undervalued compared to BAC, WFC, and JPM. If you take the FY 2010 earnings estimate (based on Thomson Reuters) you will see that the forward P/E for all 4 banks is between 10.5-12. However, only Citi is assumed to have ridiculously small earnings in 2010 (0.27 a share) .
Lets cut to the chase - pros and cons for 2Q earnings:
PROS:
1) The major plus for upside Citi earnings and for all other banks is the M2M rule suspension, especially for Citi, without it we would obviously incur losses in EPS in the entire FY 2009, no doubt about it. However, I do believe that suspending FAS 157 was a good idea, after all we have not used that rule for 70 years, why suddenly they decided to reinstate it in 2007, only to cause humongous panic later on in 2008.
2) Upward Sloping Treasury Yield Curve :
Larry Kudlow pointed out recently that "the upward-sloped yield curve is the real bailout for the banking system." The yield curve is so favorable for all banks, this is just insanely easy money for all banks. The large profits for all big banks in the first quarter 2009 are a direct result of the upward sloping yield curve and the increasing interest spread in the first quarter. Guess what the spread continued to widen in the second quarter even further!
3) Private equity secondary market offerings: May 2009 was a record month for secondaries offerings and Citi was very active on that market.
4) Overseas markets are in pretty good shape. Their revenue should be rising really quickly! In addition, overseas income will get a nice boost due to currency fluctuations.
5) Huge reduction in operating expenses: Pandit iterated again that they have reduced expenses by 25% - in the past several months Citi has cut its expenses by almost $4 billion per quarter !!! If Citi can keep or reduce the last quarter number of $12 bill. expenses, this will be tremendous.
6) Credit card losses seem to have stabilized. Citi was the only one of the big banks that had the same default rate on credit cards as April ( as opposed to BAC for example), delinquencies rates fell for second month in a row(remember that delinquencies are directly correlated with the real credit losses, not the default rates). In addition, Citi has a very small exposure to commercial real estate (only 2.5% out of the estimated stress test losses).
7) Nikko Cordial and Smith Barney are still generating revenue for Citigroup in this quarter. They should show pretty good numbers given the fact that the market was so bullish in April through mid-May.
8) Citi have reduced tremendously their risk exposure – look at the 1Q data.
Note: I think there are no savings from dividends this quarter.
CONS:
1) Citi will have big credit LOSSES this quarter , and they are the big unknown ! Hopefully the suspension of FAS 157 will help ...
2) The major problem is that we do not know what is the real earning power for Citi, their revenues got a huge boost from the "illegal" fixed-income, one-time trading of the AIG CDS, which improved the earnings by at least $2.5B in 1Q(read the earnings). Obviously all banks took advantage of the easy money offered by the AIG-feds, so we do not know without that one time boost how the earnings will look like. That is why Citi stock fall so sharply after 1Q earnings (4.40 down to 2.80 if I am not mistaken), investors needed time to read the data and realize that the absolutely surprising profit came from one-time AIG scam.
3) Citi is loosing talent due to the govt. harsh pay regulations, in addition they have reduced enormously their risk exposure, so I do not see how they can come up with any risky investments that can yield large profits. We might not see the same performance in the segments : Institutional Clients Group and Wealth Management, and these two are absolutely critical for sustained increase in the net revenue.
Re: 2Q Earnings Preview 20-Jun-09 06:59 pm Summary: The only way Citi can show improved earnings is by cutting expenses, obviously their revenues are not going to be the major moving factor due to the cuts, lay offs, brain drain, selling assets, etc...however the emerging markets can help a bit to the net revenue. But again, if Citi can keep or even lower the last quarter number of $12 bill. expenses, they will be just fine, that is the key in my opinion. If you run the numbers, all analyst estimates for FY 2010 earnings (revenues) are based exactly on the adverse scenario from the stress test. So if the credit losses are flat or even less than the previous quarter then this will lead to a huge boost, since the analysts will not extrapolate with the worst-case scenario anymore. On the other hand, the first stage of the conversion ends July 30 - just 2 weeks after the earnings release. The end of the arbitrage is important, because I estimate that anywhere between $10-15B are involved in the arb play. All these funds will be released, then what the hedge funds are going to do? Are they just going to leave the C trade??? Next move by the hedge funds will be important for the short term trend, if the earnings are good (show some upside surprise), they might invest in C , while if they are terrible or in-line with estimates then they will short and we can go back to 2.00-3.00 range. This is just my opinion, my gut feeling is that Citi will show positive earnings, not mind-blowing, but still something around $1.5-2B this 2Q. If we see earnings of that order, I believe the PPS will trade in the 4-4.50 range in August-September.
lamgol, see if you can guess who I am from this post. Everyone else, forgive me if this post seems a bit disjointed, it was in response to another question on another forum:
There is $58 billion backing the new 16.5 billion shares, about $3.51/
share average. I say average because government and private preferred
shareholders will get a better deal than public preferred
shareholders. When conversion happens, it is going to lift the price
up, not drag it down (I'm talking long term here, there will always be
short term fluctuations).
Now, some on this board and in the media have said that this
conversion is effectively creating shares for somewhere in the $2
range, which is sort of correct. There are some preferred series of C
that trade for significantly less than their $25 par value. Let's say
that some trade for $15. Since each $25 par value preferred share,
which trades for $15, is going to convert to 7.3 common shares,
$15/7.3 = $2.05/share. 7.3 is the conversion ratio for government and
private preferred shares. Government and private preferred share
holders will get a better for them (worse for us) 7.3 ratio, so I use
7.3 as the worse of the 2 ratios. The ratio for public preferred
shares is 6.8, which creates common shares at $2.20/share.
These are the shares that are really worth $3.51 after conversion
(I'll explain in a minute). So that's an immediate 42% and 37% gain
for gov/private and public preferred shareholders, respectively, which
is why arbs and other smaller players bought the preferred so heavily.
Now, immediately shorters and people that firmly hate C point this out
and state, "Haha, your new stock price should be $2.05/share, this
will dilute you real bad!" No, it really won't. They conveniently
ignored the other $10 missing from the preferred stock (Par minus
trade values). That $10 goes directly to Citibank's common equity
pool, and so does the $15, but they have to trade this for stock. The
ENTIRE par value goes to C's common equity.
You're not getting diluted, the value of your investment will more or
less stay the same, but you are getting your stake reduced. This is a
point of contention that is very heavily disputed. It shouldn't be,
but the average person on C forums has the IQ of a brick. If you add 3 new common shares of C at $3.51 for every
current common share of C at $3.13 (today's closing price), your
average price is $3.41. This stock is already undervalued by at least
$0.28 just by going with this simple math.
Furthermore, only $20 billion of the public preferred shares are
getting immediately converted to common stock, which will roughly
double the amount of outstanding shares to 11.8 billion (up from 5.5
billion). The government and private preferred shares are being
converted into an interim security which will not convert to common
stock until September. Some people feel that there is an outside
chance that these interim securities will not convert to common stock,
but it is likely that they will. Also, shorters (and to a lesser extent,arbs) are going to have to buy
back 1.2 billion shares that they shorted. There is going to be a big
short term boost in demand at the end of July/beginning of August from
short covering. Plus, it is more expensive for shorts to cover when
there's less shares in a company.
Now, your are correct in saying that the price/book ratio will be
nearer to 1 after conversion. Outside assessments of tangible book
value of C have it at around $4/share, so after conversion, C should
be closer to 1 than 0.25. P/B ratios should really be much higher than
1, they should be between 2-4, minimum. That means that C should be
trading in the $8-16 range.
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