After a decade-long bull market, it’s getting more and more difficult for equities investors to identify value opportunities. Fortunately, Citigroup (NYSE: C) is one of a handful of stocks that stands out as relatively cheap. Conditions for U.S. banks are better than they’ve been in years. C stock has double the gain of the S&P 500 index so far in 2019. It may soon get even hotter.
Even after rallying 23.8% , Citigroup stock still looks cheap. Bank stocks struggled in 2018. Citigroup stock was slammed. Shares were down more than 30% last year compared to a 18.6% drop in the 25-stock Invesco KBW Bank ETF (NASDAQ:KBWB)
Citigroup’s forward price-to-earnings ratio is just 7.5, one of the lowest valuations in the entire S&P 500. It’s also the lowest among its “big four” banking peers — Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) — by a wide margin. When growth projections are factored in, Citigroup’s price-to-earnings-to-growth (PEG) ratio of 0.57 is extremely low. It’s roughly in-line with Bank of America’s 0.54 PEG, but well below J.P. Morgan (1.23) and Wells Fargo (1.05).
In terms of price-to-sales ratio, it’s not even close. Citigroup stock trades at a 2.23 sales multiple, roughly half the valuation of Bank of America (4.27) and J.P. Morgan (4.58) and far below Wells Fargo (3.66).
Finally, Citigroup is the only one of the big four banks to trade below book value. Citigroup’s price-to-book value is 0.9. The next closest of its peer group is Bank of America at 1.22. In other words, Citigroup stock price is below the aggregate per-share value of its assets.
Banking Conditions Are Getting Better
For much of the past decade, the business of banking in the U.S. has been an uphill battle. Some might say rightfully so. Banks have faced unprecedented regulatory oversight following the 2008 financial crisis. In addition, near-zero interest rates have made it extremely difficult for banks to grow profits.
When interest rates are low, banks have very little wiggle room on their net interest margins, the difference between the rates they charge to borrowers and the rates they pay out to depositors. Lack of wiggle room results in lower profits, which have been hard to come by until the past couple of years.
To be sure, the Federal Reserve has been raising interest rates in recent quarters. However, rates remain below historical levels. To make matters worse, the Fed recently indicated is may be putting rate hikes on hold in 2019.
Bank investors may be disappointed that conditions aren’t better for big banks at this point. But there’s no question they are better than they were. Banks may not be seeing any more rate hikes in the near future. But the Fed’s fourth-quarter rate hike will not be reflected in Citigroup’s numbers until the first quarter. In addition, Citigroup cut costs in the fourth quarter and improved its efficiency despite a difficult fixed-income trading environment.
In addition, after paying essentially no dividend for years following the financial crisis, the 2.8% yield on Citigroup stock is now quite appealing.
Wall Street Skeptics Fading
Finally, after years of skepticism, Wall Street analysts have slowly been joining the bullish camp on Citigroup stock. In February, Jefferies analyst Ken Usdin upgraded Citigroup to “buy” and said a favorable global environment for institutional investors should pay off for C stock investors. Usdin also praised the company’s progress in Latin America. He said the stock’s risk-reward is “skewed positive, especially if Citi starts showing tangible progress” toward its long-term goal of 13.5% return on average tangible common equity by 2020. He’s currently ranked 27th out of 5,233 analysts on TipRanks.
Bank of America analyst Erika Najarian is also bullish on Citigroup stock. Najarian recently said Citi’s efficiency improvements are key for the stock going forward. “C cannot control how the market discounts global risk in the stock, but management can certainly execute on efficiency gains to improve relative valuation,” Najarian wrote. She expects a 1.03% efficiency ratio improvement from Citigroup in 2019 and another 2% improvement in 2020. She said that degree of improvement should get Citigroup stock at least on par with book value. Further improvements could get the stock in-line with the book value premiums of its peer group.
C Stock’s Next Catalyst
In the near-term, the next major catalyst for Citigroup stock that Wall Street will be watching are the results of the annual big bank stress tests. Najarian said this year’s test conditions were slightly more difficult than expected. However, if Citigroup can pass the test and get approved for an even more aggressive capital return plan this year, it could really get investors attention. At some point, C stock will force investors to pay attention to its low valuation.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
