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Citigroup Is Trading Below Intrinsic Value

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- By Steve Gray Booyens

Citigroup (NYSE:C) has performed well over the past year, with the bank producing solid earnings and the stock providing index beating returns to investors. Over the last two months, the market has been in a wait-and-see mood, which has caused Citigroup's stock to plateau. However, I think this makes Citigroup a brilliant opportunity for value investors at the moment.


Performance

The stock has outperformed the S&P 500 by more than twofold year to date as a low-interest-rate environment and investment banking transactional flow spurred investors towards financial stocks.

With a Beta of 1.92, Citigroup is a stock that presents more volatile returns than the index but can outperform when financial stocks become highly correlated with the broader market. The correlation between U.S. stocks and Citigroup is at a 17-year high. The sentiment on Wall Street is that financial stocks are a good play for the next 12 months as they're trading at lower multiples than most other sectors.

I'd add to the argument by saying that earnings will drive valuation, and big bank earnings are on a good wicket at the moment.

Earnings and share buybacks

The bank beat Q1 earnings estimates by 41%, mostly due to significant loan reserve release. Credit losses were reduced by $1.7 billion and credit release was $3.7 billion. Non-accrual assets jumped by 21% year-over-year. Citigroup reported a 17% increase in consumer non-accrual loans and a 25% increase in corporate non-accrual loans.

The company bought back 23 million shares in Q1, which results in a tangible book value of $88.18 per share. All of the facts and figures mentioned here can be found on the company's 10-Q.

Valuation

Citigroup poses significant value to shareholders, in my opinion. The company has strong cash flow as well as a strong one-year expected EPS multiple of 8.76.

Citigroup Is Trading Below Intrinsic Value
Citigroup Is Trading Below Intrinsic Value

Based on GuruFocus' projected free cash flow-based discounted cash flow calculator, the stock is 75% undervalued in the market. The justified forward price-earnings ratio according to this valuation method suggests that the stock could reach a price target of $98.57 by 2023 if it were to converge with the value estimate.

Wall Street analysts have also upgraded their 12-month price targets for the stock, with Oppenheimer setting the highest price target at $118.

I estiamte that the stock should reach the $100 mark within the next 12-months. However, it will likely still trade below intrinsic value due to ongoing legal matters regarding the bank's bad mortgage-backed securities (MBS) sales. In addition, the sustainability of the bank's earnings is also a doubt to many investors, which might cause the intrinsic value to move around quite a bit.

Final word

I think Citigroup is a good value stock for investors during a period in which financial stocks are favored to most other sectors. In addition, the company has recently repurchased shares, which could improve EPS if the current level of earnings is sustained.

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This article first appeared on GuruFocus.