An Anxious Q2 Earnings Test Awaits Citigroup

Representing the ultimate bellwether economic indicator, Citigroup (NYSE:C) and the big banks face a crucial earnings season test. Say what you want about leading technology firms; when it comes to gauging the broader health of the economy, you look toward vanguards like C stock. And in this case, the banking industry could either add credibility to the fragile recovery or demolish it.

citibank (C stock) sign on a window
Source: Shutterstock

Naturally, investors want to know, which one is it going to be? First, let’s dive into the stats. Citigroup is scheduled to release its results for the second quarter of 2020 on Tuesday before the opening bell. Consensus estimate for earnings per share is 28 cents. This is decidedly on the higher end of the forecast spectrum, which ranges from a loss of 29 cents to 52 cents.

In the year-ago quarter, EPS was $1.95, beating the consensus target of $1.81. This demonstrates the dramatic impact that the novel coronavirus has had on even the biggest institutions. As well, the variance in individual analysts’ estimates casts a dark shadow over C stock.

On the revenue front, Wall Street is looking for $19.1 billion. Like earnings, this forecast is near the higher end of the range, which is between $17.7 billion to $20.2 billion. In Q2 2019, Citigroup generated $18.8 billion in revenue against a forecast of $18.5 billion.

Over the last few weeks, rising cases and hospitalizations of the coronavirus has dampened enthusiasm for C stock. This resulted in several states either pausing or rolling back their reopening measures, inspiring selloffs in big banks like JPMorgan Chase (NYSE:JPM).

However, some embattled sectors like cruise liners anticipate a return to normalcy. So, which narrative will win out?

Some Reasons for Optimism in C Stock

If you’re eyeballing banking stocks as a discounted opportunity, you certainly must appreciate the latest news over Royal Caribbean Cruises (NYSE:RCL). From an SEC filing published late last week, Royal Caribbean purchased the remaining shares of Silversea Cruises that it did not already own.

Granted, the cruise liner paid for the remaining one-third stake with 5.2 million shares of RCL stock. Of course, this is a maneuver to save cash due to the present crisis. However, the overriding message is that management definitely forecasts an economic recovery.

You couldn’t get a stronger signal than an organization putting its money where its mouth is. Though not a direct impact, it certainly bodes well for C stock. After all, if one of the hardest-hit industries is willing to gamble big on the American consumer, other better-heeled sectors should follow suit.

But perhaps the biggest upside catalyst for C stock is last month’s banking stress test. Conducted by the Federal Reserve Board, it also added a sensitivity analysis to the mix. Encouragingly, Vice Chair Randal K. Quarles stated, “The banking system has been a source of strength during this crisis…and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”

I must note that the Fed’s assessment of downside risk scenarios are “not predictions or forecasts of the likely path of the economy or financial markets.” However, contrarian investors have an opportunity to buy C stock amid current record cases of the coronavirus.

In other words, the resurgence of Covid-19 may be more bark than bite. And that could lead to nearer-term profits for daring investors.

Long-Term Risks Piling Up

Given the present setup of a currently strong banking industry and optimism in the business world, I don’t doubt the potential in C stock creating an upside trading opportunity. Furthermore, the Covid-19 death rate remains at a relatively low threshold for now.

Later on, though, I suspect that deaths will rise, which poses sentiment woes for Citigroup and the broader economy. Politically as well, you can’t expect state and local leaders to ignore the science. Especially in a crucial election year, there’s every incentive in the known universe to be on the right side of history.

Gambling on American lives is just not in the cards, Democrat, Republican or anything in between.

Permanent job losers (unadjusted, in thousands)
Click to Enlarge
Source: Data from the U.S. Bureau of Labor Statistics

Moreover, I’m very concerned about the labor market. Yes, the unemployment rate has gone down significantly percentage wise from its peak. However, the number of permanent job losers continues to move higher. According to the Bureau of Labor Statistics, permanent job losses totaled 2.825 million in June. That’s roughly the same count in May of 2014, where we saw 2.843 million permanent losses.

Plus, weekly initial jobless claims continue to number in the millions. Over the last 16 weeks, nearly 50 million people have filed for unemployment benefits. That’s a staggering figure that is trickling into the white-collar occupations – exactly the kind of clients that Citigroup services.

Conservative Investors Need Not Apply

Again, I see the nearer-term opportunity in banking on the disconnect between ugly coronavirus headlines and bullish business sentiment. However, over the longer term, I believe that this disconnect will be reconnected toward the less attractive segment of the economic spectrum.

Why? Until I see a conspicuous reduction in foodbank lines, unemployment benefits requests and general despair, I can’t recommend C stock. That’s especially true if you want to play it safe with your portfolio. If people start to hunker down – which I strongly suspect they will – that impedes money velocity.

In turn, this and other economic pressures will cause the Fed to adopt an interest-rate-killing dovish monetary policy. With a reduced growth and earnings environment, Citigroup is a wait-and-see name for me.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


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