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Despite Earnings Beat Citigroup Has a Long Way to Go


This morning Citigroup (C) reported adjusted EPS of $1.23 on revenues of $20.5 billion. The results were well ahead of Wall Street estimates of $1.17 and $20.1 billion, respectively, but as we saw with JP Morgan (JPM) and Wells Fargo (WFC), big banks can report almost anything they want depending on the assumptions they choose to make. Items like loan loss reserves and how they choose to adjust their hedging book at the end of a quarter makes apples to apples comparisons all but impossible.

Yahoo! Finance senior columnist Mike Santoli says Citi's results were cleaner than JPM or Wells, but the real question is where the company is headed under new CEO Michael Corbat. Corbat took over Citi almost immediately after the company reported earnings for Q3 2012, then "cleaned the deck" in Q4 by including a $1.3 billion legal expense in numbers. Now he's got a clean slate to start putting a stamp on the company.

Corbat has two choices. One is break the company down and turn it into what amounts to the old Citibank; a retail model with a corporate kicker. The other alternative is clinging to the current model of trying to be everything to everyone. The latter would be somewhat ironic given that it was Citi under Sandy Weill that cobbled the model together in the first place, but obviously much has changed in the decade plus since those moves were made.

What's it mean for Citi shares as the company stands today? It's hard to make more than an educated guess in terms of valuation on a company that could be in a different business by this time next year. "In terms of a value play, I feel it's kind of like the other banks in that it's going to trade based on return of capital, yield curve, all that stuff that they don't control."

Citi has a long way to go before it can truly be considered a peer of the other financial survivors from the meltdown. The Financial Select SPDR ETF (XLF) has recovered about 50% of what its lost since 2007. Goldman (GS) trades at 2/3 of it's all time high and JP Morgan has recovered almost all of its meltdown decline.

In sharp contrast, Citigroup peaked at a reverse-split adjusted $550 meaning even a 10x return from here wouldn't bring the buy & hold crowd back to even. The company may be on the right track under Mr. Corbat, but there's plenty of time for investors to decide whether or not they want to play a recovery.