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Between Chris and I, we decided that a good stock to start with would be Citigroup. Since Chris is handling all the legal and financial stuff that made him Treasurer. Since Chris couldn't be Treasurer and President (something about embezzling funds) I got to be President. As President, I guess it only makes sense if I review the first stock.
I am building an excel sheet which automates the NAIC Stock Selection Guides. The Citigroup Stock Selection Guide is now available for your review. I'm having troubles with the graphing functions for the second page. I have to add another page or two. Hopefully I'll have the last page up by Christmas. You can adjust the figures for your own reports later.
Citigroup was formed on October 8, 1998 through the merger of Citicorp and Travelers Group. Citigroup includes Citibank, Salomon Smith Barney, Citibank Credit Cards, CitiFinancial (consumer loans), Travelers Insurance (Life, Property, etc.), Citigroup Global Investment Banking, Citigroup Global Relationship Banking, Salomon Smith Barney Investment Banking , Travelers Property Casualty Insurance, Schroder Salomon Smith Barney Financial Holdings, Primerica Insurance amongst other brands and company names. Citigroup published in their 2000 annual report that they had 230,000 employees. Simply put, it’s a massive corporation. They are global. They have people in over 100 countries. They actively trade 128 currencies. They have the whole range of financial services. They are the only corporation of their type and size in the world. There are other companies like JP Morgan Chase which are competitors, but they are not as large or diversified.
Citigroup is projected to have 15% earnings growth over the next 3-5 years. If the stock price holds with similar price-to-earnings ratios, the price should also grow 15% per year for the next 3-5 years. If it did go up 15% a year for five years, we would double our money in that time. Citigroup also pays out a dividend. It’s not a large dividend, but that would add to the amount of money that we could earn.
The risks for Citigroup are there. If certain currencies drop significantly relative to others, because they are so international, they could see that hurt their earnings. They do have some current businesses which have hurt their bottom line. Their businesses in North America are not growing very rapidly. Their emerging markets business is growing fast. If the recession hurts their banking or investment business (lack of activity = lack of fees) they will not earn as much money. Also, if any of the emerging markets, such as Argentina, collapse, their businesses could get hurt.
Opinion
I rate the stock an AB (flashbacks to those days at Madison). I believe that their earnings will be steady or increasing. I believe that they are so diversified that if one area under-performs that another area could make up for it. I think that 15% revenue growth for five years, for a company of this size could be difficult. If they only had 10% revenue growth a year, I think we would all be happy. If they only had 5% growth, I think we would all be disappointed. I feel that their revenue growth will grow between 10% and 15%. If it were a smaller company and/or the projected growth were over 15%, I would have rated it an A.
Corporations are in the business of making money. How well a company does is measured by their earnings. The more money a corporation earns, the better it does and the more it's worth. (not rocket science here) The way investors make money is by purchasing a company's stock at a low price and selling at a high price. (tough concept too) Every quarter, each corporation puts out an earnings report. This tells investors how much money they earned in the previous quarter. When you total up the earnings over the past four quarters you have their earnings over the past year. Most time when investors talk about earnings, they talk in terms of earnings-per-share (EPS). You take the total earnings by the company over the past year and divide that by the number of shares of common stock.
The stock price fluctuates as investors buy and sell a stock. The price of the stock divided by the earnings-per-share over the last year is the price-to-earnings ratio or P/E ratio. Because the price is changing all the time, the P/E ratio is changing all the time. Let's look at an example. Let's say Chris has a business selling insurance. Let's say his earnings-per-share over the past year were $2.00. When his stock is trading at $20 per share, the P/E of his stock is at 10. When his stock is trading at $40 per share, the P/E of his stock is at 20. When a lot of people want a particular stock or people think that a particular stock is going to increase in value significantly, they will be willing to pay more for the stock. Most times this will mean higher P/E ratio. Look at the difference between an old manufacturing company and a pharmaceutical company. The manufacturing company will trade with P/E ratios of 8-15 while the pharmaceutical companies will trade with P/E ratios of 15-50. People believe that there is more earnings growth potential in drugs than in things like steel or chemicals.
Let's get back to the example of Chris's business. Let's say that his stock trades with P/E's of between 10 and 15. That means that his stock is trading at between $20 and $30. If I think Chris will have earnings-per-share of $3.00 next year and his stock trades at P/E ratios in the same range, that means that next year his stock should trade between $30 and $45. Chris will post a 33% gain in earning. That's pretty good. If a lot of investors see that, and they think he will be able to sustain that growth, they will want to purchase stock in his company. Most likely, his stock will trade at higher P/E ratios. If Chris's company disappoints us in the future, his prospects for growth might not seem so good. His company's stock price might fall due to future earnings concerns. The P/E that his stock is trading at may fall or his EPS might fall. Either way, the stock price will probably fall.
What does that mean for Citigroup?
Citigroup has traded with an average P/E ratio of 16.8. It is currently trading at a P/E of around 19. In the past 4 years that the company has been around, it has had an average low P/Eof 12.3 and an average high P/E of 21.3. The current EPS is $2.56.
$2.56 x 16.8 = $47.71
That's a little higher than the current share price. As a stock club, we're looking for a stock that is either at a low price or a company that is going to grow or both. Most of the time, we will look for a company that is going to grow. That way, we don't have to sit and watch the stock price every day or every hour or every minute.
Prospects for growth
Citigroup is estimated to have EPS of $3.27 next year. Let's say that for some reason, all next year the stock trades a low P/E (like the average low P/E of 12.3) That would mean that the stock price would be:
$3.27 x 12.3 = $40.22
If the stock traded as it has over the last four years, with an average P/E of 16.8 that would mean a stock price:
$3.27 x 16.8 = $54.94
The earnings for Citigroup are expected to grow at a rate of 15% a year for the next 3-5 years. What would that mean for the stock price?
Next year's EPS is forecasted (by 24 wall street analysts) to be $3.27. If it grows for the next two years at 15 percent that would mean:
$3.27 x 1.15 x 1.15 = $4.32
or
$4.32 x 12.3 = $53.13
$4.32 x 16.8 = $72.58
If we purchased the stock at $48 and sold it three years from now at $53, we would be disappointed. We would only have made 10% over three years. If we sold at $72.50, we would be happy. We would have a 50% return over 3 years. Our goal in this club should be to double our money every 5-7 years. That means we will want returns greater than 10% yearly. We should actually shoot for 15% gains yearly. Sometimes we'll meet it. Sometimes we won't. But we'll definitely try.
I have updated the information in the excel sheet to reflect the current price, P/E ratio and forcasted earnings. You can look at the equations in the sheets to see how things are calculated.
Citigroup has had a history of growth since its formation. They have grown some businesses “organically.” (read increases in income from the same business). The rest they have increased through acquisition.
Citigroup 2001 Third Quarter Report
Citigroup 2000 Annual Report
Citigroup 2000 Annual Report-Financial Supplement
Citigroup 1999 Annual Report