Even in a climate of deregulation, economic growth and rising interest rates, big banks have struggled in 2018 thanks to a flattening yield curve. Citigroup Inc (NYSE: C) has lagged even many of its banking peers year-to-date, but Bank of America analyst Erika Najarian says long-term expectations for Citi are way too low at this point.
According to Najarian, investors are right to be skeptical of Citi’s 2017 guidance that it can reach $9 in earnings per share by 2020, up from $5.34 in 2017.
“The market remains skeptical about the company reaching its 2020 targets and has continued to discount global growth risk in the shares,” Najarian says.
However, after a recent meeting with Citigroup management, Najarian says the company is convinced business momentum is picking up and Citi’s branded U.S. card business is nearing an upswing.
So far this year, the Financial Select Sector SPDR ETF (XLF) has gained just 0.7 percent, suggesting financial sector stocks have significantly underperformed the S&P 500 index return of 6.1 percent. Citi stock has performed even worse, declining 2.7 percent year-to-date.
Najarian says Citi’s current share price has set an extremely low bar for the company to clear in coming quarters.
“We believe the stock is, at this point, so discounted that it is still inexpensive even if the company falls short of 2020 goals, which many investors don’t seem to believe anyway,” she says.
Bank of America is projecting Citi may have a difficult time hitting $9 in EPS by 2020, but it could reasonably get to $8.25 if it can grow revenues by at least 2 percent annually, achieve a 54 percent efficiency ratio, and reduce its share count by 21 percent via buybacks.
Citi stock is currently priced at a heavy discount to bank peers based on 2018 and 2019 earnings estimates. Even assuming Citi falls well short of its $9 2020 EPS goal, Najarian says Citi stock is currently trading at only 8.7 times her $8.25 2020 EPS estimate, the lowest 2020 earnings multiple of the big bank group.
Najarian says…
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