Banks are On Sale, It's Time to Buy!
Tuesday, February 2nd, 2016
Yesterday I did a post on social media about the minimal effect energy loans have on banks. As an example, I used the bank Citigroup and what effect the default of energy loans would have on their loan portfolio; it was very small.
Since the tough times banks went through in 2008 and 2009, they have really worked hard to strengthen their balance sheets. In addition, the valuations that the banks are currently trading at have not been seen since 2011.
Citigroup has been hurt the hardest, falling roughly 20% in 2016. The stock has a 52-week range of $39.44 and the high price over the last 12 months of $60.95, so investors currently won’t be buying this company at the peak.
They are still having some difficulty meeting some of the government requirements and therefore are only allowed to pay a half percent dividend, which is very low compared to some of the other big-name banks. But other than that they appear to have enough strength to continue going forward, and with a market cap of $125 billion I don't believe this bank is at risk to be broken up.
It is nice to see a company that has earnings over the last 12 months, and to see that investors are not paying a higher amount for those earnings. Citigroup (which trades under the symbol C) has a current PE ratio of 7.9. Price-to-sales for the bank also look attractive at 1.7, when the industry average is at 2.0.
Tangible assets are very important for any company, inclusive of a bank and what an investor pays for them. For the tangible assets of Citigroup, investors are paying what looks like a fire sale at 0.65, almost half the industry average of 1.14. Price-to-cash flow is the only valuation ratio that favors the industry average at 6.0, versus the bank at 7.9.
Sales for Citigroup have actually fallen by 5.1% year-over-year for the last 12 months; not as good as the industry which has climbed 1.4%.
Citigroup is showing great earnings growth of 146% year-over-year for the last 12 months, which is much better than the industry average of 10.7%. If you are going to invest in Citigroup, you need to understand how the earnings grew at such a great rate when sales were down 5%.
Caution: Do not invest in this company if you don't understand the earnings growth.
Return on equity for Citigroup is 8.1%, which is low by my standards and below the industry average of 9.3%. What looks good for the bank is their net profit margin of 22.8%, which is better than the industry average of 20.4%.
Looking ahead to December 2016, the earnings per share estimate stands at $5.86. This is better than 2015 at $5.45, and well above the troubled times of 2014 when the bank only earned $2.25 per-share for their investors that year.
Using a reasonable forward PE of 16.5 based on 2016 earnings of $5.86, the target sell price for this company would be $96.69. With the stock currently trading around $41 a share, doing the math, there is a potential gain of 126% on the stock (if everything works out perfectly.)
Compared to the other big banks Citigroup appears to have more of an uphill battle, however that is why investors have the potential for the bigger reward. Another surprise for investors, which would also boost the stock price a little bit would be if the government would deem Citigroup strong enough to increase their dividend.
I will not say this is the bottom for bank stocks (including Citigroup,) but I think we are pretty close. So if you're looking for a bank stock to add to your portfolio, consider Citigroup; but as always, do some more research based on what I have given you here. Perhaps you will see some good returns from Citigroup in the future.
stand that there are a lot of good companies trading at very good prices or valuations for the long-term investor.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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