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Tickers in this Article: C, BAC, WB
Citigroup (NYSE:C) recently released earnings of $1.24 per share, growing profits by 18% for the first quarter. This stock has been out of favor for a while now, and this surprisingly positive news was muted by concerns over other earnings misses and over the financial sector as a whole. Despite the past, I think Citigroup is finally worthy of some positive attention again.

This stock has been essentially flat for the past four years, while the rest of the market has enjoyed a hefty rise. This slump came not too long after Chuck Prince took the reins of CEO from Sandy Weill.

I've heard Citigroup shareholders and employees alike reminisce about ol' Sandy, a time when Citi's empire and share price were growing by leaps and bounds. The Prince years, however, have been marked with mismanagement and stagnant stock. Examples of mismanagement have been poor consolidation of compatible businesses, poor planning of overseas expansion and plunging customer satisfaction.

Meanwhile, competitors like Bank of America (NYSE:BAC) and Wachovia (NYSE:WB) have been ranking higher in service ratings, increasing profits and stealing market share. Wachovia, the fourth-largest U.S. bank, recently reported a 24% growth in profit. (To read more on this subject, see Analyzing A Bank's Financial Statements.)

Breaking the Slump
This is the largest earnings surprise for the company since Chuck Prince became CEO, and is the second consecutive quarter of positive growth. It's too early to call it a turnaround, but the past year has seen several efforts to improve the faltering company. Big news for Citi came in the form of 15,000 job cuts. While that seems like a lot, it was only about 5% of the company's workforce. Though not good for the individual workers, it is always positive to see management willing to cut unnecessary costs when you're an investor.

The second positive note is that overseas business is starting to show very positive results, with international profits growing 35%. New initiatives for domestic commercial banking have been taking place as well. After the last few years of embarrassing performance in customer satisfaction surveys, the company has been ramping up its efforts in this area. Another positive for Citi is the integration of Smith Barney financial advisors into many Citibank branches. This should have been done a while ago, but I think these efforts should now start driving more commercial banking business in the future.

Hidden Value
These problems have dimmed one of Citigroup's brightest stars, its Corporate and investment banking section, which has been a stellar performer. This quarter was no different as revenues for the area grew 33%, its best performance yet. Wealth management, which includes the Smith Barney brand, also saw revenues rise 28% as it saw benefits from increasing its stake in Japan's Nikko Cordial. Corporate and Investment banking and wealth management businesses have extreme value, and have been overlooked due to other underperforming businesses within Citi.

Investors Growing Restless, Catalyst to Come?

In the past four years, since July 7, 2007, the stock has shown a total return of only about 10%, while the S&P 500 has risen over 50%. Shareholders must be more than a little fed up with not taking part in recent rallies. It has been suspected that Citi's largest shareholder, Prince Alwaleed, has been getting restless. However, recently activist hedge fund manager Eddie Lampert took an $800 million stake in the company. Cost cuts and small improvements have uncovered quick profit growth in the business, but a bigger catalyst can unlock much more. This catalyst can come in several forms - a management change, strategic change in company direction, or possibly a break up of the underlying businesses.

Time to Jump in?

Any of these factors could drive large appreciation in the stock. Is hope for a catalyst enough for me to buy the stock? No. But the recent operational successes have made the stock attractive otherwise, and the likelihood of big shift within the company just makes it even more attractive.

The risks going forward still include current management and worries over the effects of consumer credit and subprime loans. There is an overhanging concern with the whole financial sector in the current market environment. However, I believe that at the current price around $50, the risk/reward tradeoff looks very attractive. Shareholders won't stand for a flat stock much longer. This is a stock to hold for the next few years while collecting a 4.2% dividend and waiting for the company's value to unfold.

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