Citigroup Too Cheap To Ignore

By Ryan C. Fuhrmann | May 26, 2012 AAA

Global banking giant Citigroup (NYSE:C) started off the year on a strong note and its stock showed gains of around 40% toward the end of March 2012. Those gains have since evaporated, and the stock is back below $30 per share. It appears again that the market has become too pessimistic about Citigroup's future, as well as financials in general. At this point, the stock has become too cheap to ignore.

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Recent Developments
Operationally, Citigroup continues to recover from the depths of the credit crisis. A recent corporate presentation detailed that every core business grew in the first quarter, though this conveniently excludes Citi Holdings, an array of soured and non-core assets held over from the banks near-undoing a few years ago. Citi Holdings have been steadily whittled down and ended the first quarter at just over $200 billion.

North America continues to be the biggest driver of Citigroup's fortunes. Over the past 12 months, the region accounted for 41% of revenues. Management is quick to point out that it has exposure to faster growing regions and emerging markets. Emerging Asia represents 17% of the top line and Latin America 20%. Developed Asia brings in another 4%.

SEE: Understanding The Income Statement

European Fears
The stock has likely traded down recently over fears about a breakup of the European currency union; but Western Europe only represents 10% of Citigroup's revenues. It has also detailed only several billion of credit and asset exposure to the most embattled countries, such as Greece, Spain and Italy. As of the end of the first quarter, it listed only $6 billion in credit exposure to the PIIGS countries, including the above three as well as Ireland and Portugal. This isn't much out of a total balance sheet with close to $2 trillion in total assets.

Outlook and Valuation
Analysts currently project full-year revenue growth of only a couple of percent and total revenue north of $80 billion. The average profit projections currently stands at $4.13 per share and would represent a return on equity of about 7.1% from the $61.90 in book value per share Citigroup listed.

Given the above metrics, Citigroup trades at a forward P/E of 5.7 and price to book of 44%.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
Uncertainty is unquestionably high in Europe, but Citigroup is not directly in the line of fire. This makes it stand out from global rivals that include Santander (NYSE:STD), BNP Paribas and Deutsche Bank (NYSE:DB) and exist more on the front lines of any emerging crisis. Unlike its larger peers and more regional rivals that include U.S. Bancorp (NYSE:USB) and PNC Financial (NYSE:PNC), Citigroup is also not tied to a slower-growing U.S.

A premium valuation is hardly warranted on Citigroup. Many investors and former shareholders are extremely bitter at how it destroyed their capital back in 2008 and into 2009 and was forced into a government bailout. Regardless of its past, its global banking franchise looks to be a compelling and profitable business, and it should arguably trade up to industry averages. With any future growth, the stock has a good chance of rising, perhaps substantially.

SEE: Earning Forecasts: A Primer

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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