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  1. 1. Investment Rating Citigroup Inc. (C) HOLD I. Investment Highlights Pricing (9/19/05 4:00 p.m. ET) Closing Price $45.36 Company Profile 52-Week High $49.99 Headquartered in New York, NY, Citigroup Inc. (Citigroup) is a 52-Week Low $42.10 diversified holding company providing financial services globally to consumers and corporations. Citigroup offers a wide Valuation array of financial services through its subsidiaries. Citigroup’s FY (Dec) Dil. EPS P/E 2003* $3.42 14.2 business segments include Global Consumer, Global Corporate 2004* $3.26 14.8 and Investment Bank, Global Wealth Management, Global TTM $3.26 11.6 Investment Management, Private Banking and other investment 2005E -- 10.26i activities. Each of the subsidiaries are strong and viable *excludes weighted average options businesses in their own right, but as a conglomerate, it is i Source: Thompson Financial Solutions seemingly impossible to estimate or even understand its competitive advantages through synergies (e.g., using low Profitability & interest deposits to fund high-yield consumer loans, consumer Effectiveness (ttm) ROA 1.4% finance or credit cards). Through its subsidiaries, Citigroup ROE 18.9% offers banking, lending, insurance, investment, mortgage, asset Profit Margin 26.8% management, and wealth management services/products. ROCI 6.5% Citigroup employs 287,000 people in 4,500 locations in 100 countries in its attempt to become the services group of choice in Market Data fulfilling the financial needs of consumers and corporations Total Assets (B) $1,547.8 alike. Citigroup sets itself apart from its top three competitors: Volume (000) 12.048.3 JP Morgan Chase & Co., Bank of America Corp. and Deutsche Market Cap (B) $234.51 Bank AG by the extent of its global breadth. Avg Vol (000) 15,625.6 EPS (ttm) 4.04 P/E (ttm) 11.22 Growth Dynamics Div & Yield 1.76 Under the red umbrella - Citigroup has experienced a three year ttm- trailing 12 months; B - Billion revenue growth rate of 3.53%, which is much improved over their five year revenue growth rate of 0.69%. Earnings growth Wesley Detwiler rate for three and five years are 6.48% and 7.42%, respectively. Despite the one percent decrease in earnings over the same Chad Parrish period, Citigroup’s dividends have increased 4.59%, up from 29.53%.i Global Consumer Net Income is up for the second quarter ending June 30, 2005 in each major operating region1, William Reynolds except Europe, Middle East and Africa (EMEA). Citigroup reported Global Consumer Net Income of $274 million, but Total Global Consumer Net Income slid $205 million due to a Matt Tinsley $497 million Global Consumer Net Income decline from the same time a year before. However, Citigroup reported a $17 million increase for six months ended June 30, 2005, from the same period ending June 30, 2004. 1 North America, Mexico, EMEA, Japan, Asia (excluding Japan) and Latin America 1
  2. 2. Typical of a business of its size, Citigroup is growing through acquisitions. First American Bank in Texas (FAB) was added to the “red umbrella” of Citigroup, resulting in the addition of 106 branches, 120,000 customers and $4.2 billion of assets under management on March 31, 2005. Citigroup acquired a portfolio of $115 billion formerly serviced by Principal Residential Mortgage, Inc. (PRMI) on July 1, 2004. Through the acquisition of KorAm, Citigroup added $10 billion in deposits, $12.6 billion in loans, $11.5 billion in Retail Banking, and $1.1 billion in card services. Amid the acquisitions, Citigroup began divesting itself of businesses and portfolios totaling approximately $6.5 billion, citing non-strategic differences. On September 12, 2005, Citigroup announced an agreement to sell a substantial portion of its Legg Mason Capital Market business to Stifel Financial Corp (Stifel). Stifel will pay a premium in excess of the book value of the assets being acquired. Citigroup’s Retail Banking reported a net income of $1.241 billion and $2.550 billion for the second quarter 2005 and the first six months of 2005, respectively. Total average customer deposits have increased for the second quarter ending June 30, 2005 to $278.1 billion from $259.5 billion during the same period the previous year. Similarly, total average loans increased to $215 billion in the second quarter 2005, up from $179.5 billion in the second quarter 2004. In sum, due to the solid performance of Citigroup’s stellar subsidiaries, and despite their large size, it is still able to post double-digit revenue growth. 2
  3. 3. II. Executive Summary Citigroup Inc. is one of the largest employers in the United States and the around the world. With 287,000 employees in 4,500 locations and in 100 countries, Citigroup has developed a global brand to deliver financial services to its retail, corporate, and institutional clients. This money center banking conglomerate is expected to return a 3.5% growth rate over the next three years according to some analyst estimates. As part of a portfolio, Citigroup (C) will provide a high quality company with future growth potential at an attractive price. Currently Citigroup trades at 11X its earnings; below the industry as a whole and its direct competitors in most cases. As detailed in this report Citigroup is not currently realizing much growth for its existing business operations. However, overall growth is not out of the question as management expects to continue its trend of global expansion. This conquering of the international market is where we believe that Citigroup can realize its growth potential. Historically, Citigroup has grown through acquisitions and mergers and it appears will continue to do so under the leadership of Charles Price. What Prince intends to do is not simply grow for the sake of becoming larger, but grow to align Citigroup with its strategic initiatives. With $80 billion in revenue in the last twelve months and 15 brand names, Citigroup dwarfs its competition. Citigroup’s recent stock price has jumped largely due to the announcement on September 12, 2005 of the sale of part of its Legg Mason subsidiary to Stifel. Since the week before this announcement, Citigroup’s stock price has increased and held nearly $2 per share. Investment Recommendation: HOLD Pros: • Large, well diversified financial services conglomerate fits nicely into portfolios • With global expansion as its goal, Citigroup has an opportunity for future growth • Relatively inexpensive stock price trading at only 11X earnings • Increased corporate governance mechanisms renew investor confidence in management Cons: • Slowed growth recently with expected negative growth in the current quarter • Decreased earnings estimates for current quarter in the most recent 90 days • Constant growth valuation model prices Citigroup at approximately $39 • Underperformed the S&P 500 at every interval over the previous year Citigroup’s short term outlook does not persuade us to recommend a buy decision. However, we feel that this information has already been taken into the stock prices because of the earnings adjustments. We do feel that in the future Citigroup will overcome its problems and begin to realize its growth opportunities. 3
  4. 4. III. Company Description Citigroup is the world’s largest financial services firm due to its global presence. Citigroup expanded its global breadth with stakes in regional banks on the international level. Domestically, Citigroup has over $1 trillion in assets with such subsidiaries as CitiBank, CitiInsurance International Holdings Inc., CitiFinancial Credit Company, CitiMortgage, GrupoFinanciero Bankamex and Smith Barney. Recently, Citigroup has moved into the store-branded credit card segment and has made acquisitions of complementary services companies. Citigroup, through its subsidiaries, is one of the largest underwriters of stocks and bonds in the world. Citigroup has recently experienced losses and negative publicity for possible conflicts of interest in IPOs, a $2.65 billion settlement in the aftermath of WorldCom, $5 billion in legal fees and settlements subsequent to the Enron scandal and misleading clients in the Japanese bank market. Citigroup Subsidiariesii Global Consumer serves individuals and small businesses via local branches, offices, and electronic delivery systems (ATMs, the Internet, Automated Lending Machines (ALMs), and the Primerica Financial Services (Primerica) sales force. Global Consumer includes Cards (MasterCard, Visa, Diners Club and private label credit cards dba Citi Cards), Consumer Finance and Retail Banking. Corporate and Investment Banking (CIB) serves corporations, governments, institutions and investors located in 100 countries with financial products and services. CIB includes Capital Markets and Banking and Transaction Services. Global Wealth Management is one of the leading providers of wealth management in the world. Global Wealth Management includes the Smith Barney Private Client, Citigroup Equity Research Businesses and the Citigroup Private Bank. Alternative Investments is the management of private equity, hedge funds, real estate, structured products and managed futures. Alternative Investments is responsible for the management of Citigroup’s proprietary portfolio. Leadership Charles Price assumed the role of CEO and Director in October 2003 subsequent to the retirement of the legendary Sanford Weill, who will remain Chairman of the Board of Directors through 2006. Some believe that Weill still has a disproportionate amount of control of the day-to-day operations of Citigroup, compared to other Chairman. Robert Willumstad became COO at the same time as Price became the top executive and has most of the business unit leaders as direct reporters. 4
  5. 5. IV. Economic and Industry Environment A recent Business Week article ("Citi: A Whole New Playbook", 2/14/2005) details the ways in which Citigroup's culture has changed since Chuck Prince took over as CEO, replacing empire-builder Sanford Weill. In 18 years as CEO, Weill built the largest financial institution in the world. His boldest move was the 1998 merger with Travelers Insurance. Times have changed recently, as Prince sold off the last piece of Travelers Insurance. The growth strategy has been altered as the company concentrates on core profitable businesses; banking and credit card operations. According to the article, Price "took a large step from its original goal of becoming a one-stop financial shop that produces all its insurance and banking services." The idea of synergy between banking and insurance was a reasonable one, but the reality was that there was little crossover between business units. Prince now looks for "small, targeted investments that play to its strengths while selling of businesses that have become dead weights." That describes perfectly the “gin rummy strategy” that oligopolies have to master to survive. Among units recently discarded are the Electronic Financial Services unit and the equipment-leasing business, as well as a 20% stake in a Saudi financial group. On the pickup side, Citigroup recently bought Washington Mutual Finance, a consumer loan company, Knight Trading Groups' derivatives trading group, and ABN AMRO's securities-clearing business. It's expected that more international expansion in commercial banking will take place, given Citigroup's new cash influx from the Travelers sale. The process of getting just the right cards and making a coherent oligopoly is a complex and dynamic one. Being big isn't enough; it's a matter of being big in the right market segments. The following two charts express growth prospects at Citigroup, Inc. Growth Rates and Outlook 3-year 5-year 3.53% 0.69% 6.48% 7.42% 34.12% 29.53% Pct change EPS YTD vs. Last YTD: 63.4% $ Change EPS YTD vs Last YTD: 0.78 Outlook Estimated EPS Growth (current FY) 4% Estimated EPS Growth (next FY) 4% Est. EPS growth rate 11% Forward P/E Ratio 9.7 Price-to-Earnings Growth (PEG) 1 Source: CoreData, Inc 5
  6. 6. Revenue Est. Current Quarter Next Quarter Current Year Next Year Avg. Estimate 20.47 B 21.60 B 85.60 B 90.27 B No. of Analysts 4 3 5 4 Low Estimate 20.00 B 20.52 B 82.37 B 84.78 B High Estimate 21.33 B 22.69 B 88.50 B 95.02 B Year Ago Sales 20.51 B N/A N/A 85.60 B Sales Growth -0.2% N/A N/A 5.5% Source: Citigroup is a highly diversified financial services provider and has $1 trillion in assets. Citigroup operates not only throughout the United States but is also a prominent player globally. Citigroup's growth through acquisitions is by no means unique. Rather, it is reminiscent of the typical bank and non-bank consolidation that occurred in the nineties and early two-thousands. Currently, thirteen financial holding companies hold more than $100 billion in assets. The largest organizations now have countrywide presence and offer a broad array of financial products even though there are more than 6,000 separate banking organizations in the United States. Competition The financial services industry remains highly competitive despite the consolidation that has taken place. Not only do banks face competition from non-bank financial service providers, but they also encounter intra-industry competition. “Virtually every financial product offered by the banking industry is also offered--either identically or by a close substitute--outside the regulated financial services industry (” Technology has changed the banking industry in many ways. First, real-time access to credit information and public records are possible due to technological advances from the past decade. This ability to data mine allows providers of financial products to identify target markets with minimal geographic restraint. This advancement has fostered development of monoline-credit-card and mortgage lenders that have become major market participants in a very short time. Second, technology has allowed organizations to separate the various business functions, such as product marketing, credit review and administration, and asset funding. The location of each of these functions is based on separate criteria, such as the availability of labor or the tax environment. Third, “technology has helped institutions monitor and manage risk by hedging exposure to credit risk and interest rate risk or by selling certain assets in secondary markets (” The fourth factor is the practically unanimous corporate goal of maximizing shareholder value. The motivation for this goal is obvious. The stock market has awarded a price- earnings premium to financial institutions that consistently outperform their competitors. This premium translates into highly receptive capital markets and enhanced compensation to employees through stock options and provides the institution with a strong currency with which to pursue mergers or acquisitions. 6
  7. 7. Although all of these positive aspects of these environmental factors exist, so do the potential negatives. The consolidation that has created these giant institutions has also created many new risk-management challenges. For example, enhanced competition has brought increased pressure on interest-rate spreads, and when combined with the continual pressure for earnings performance, can encourage either imprudent risk-taking or a push for aggressive accounting treatment. One example of this is the fiasco with Arthur Anderson and Citigroup. The following table is a comparison of Citigroup, Inc. with several of its biggest competitors. BANKS RANKED BY ASSETS Market Company Symbol Price Change P/E Cap Citigroup Inc. C 45.36 -0.20% 234.51B 11.22 Mizuho Financial Group, Inc. Private - View Profile Sumitomo Mitsui Financial Group Inc. Private - View Profile UBS AG UBS 85.15 -1.21% 86.52B 12.41 Deutsche Bank AG DB 91.50 -2.11% 42.44B 13.23 HSBC Holdings plc HBC 81.11 -0.27% 31.01B 13.73 JP Morgan Chase & Co. JPM 34.59 -1.14% 121.51B 19.64 BNP Paribas Private - View Profile Bayerische Hypo- und Vereinsbank Private - View Profile Aktiengesellschaft Credit Suisse Group CSR 44.95 -1.40% 49.93B 12.98 V. Company Position Market Information 7
  8. 8. The fundamentals of marketing for Citigroup are described here. In this section we briefly discuss how Citigroup practices marketing in relation to its product, price, promotion, and distribution. Products of Citigroup are numerous and cover a wide array of financial services from global consumer activities to asset and investment management for individuals and businesses. The company is divided into three segments and two stand alone businesses that provide a number of different products. The Global Consumer Group serves domestic and international clients with diverse services offering: banking, credit cards, loans, and insurance. The Corporate and Investment Banking division advises companies, governments, and institutional investors on every aspect of banking, capital and market access, and transaction and cash management. A global focus allows Citigroup to access customers around the world, with branches in 100 countries, and provide these services to help clients reach their strategic mission. The Global Wealth Management division’s goal is to maximize value for both its institutional and private customers. Citigroup is in business to serve its clients. In order to stay competitive they must continue to offer these services at attractive prices. Its retail segment generally gets its revenue in the form of interest on loans and fees associated with servicing those loans. As a financial services company, it is difficult to compare their price within the industry. When looking at revenues however, Citigroup has over $80 billion in revenue in the previous 12 months while their nearest competitor, Bank of America, has only $53 billion. Citigroup’s marketing activities in regard to promotion are extensive. They take advantage of nearly every advertising medium; print, television, billboard, newspaper, and internet. They have a very strong brand name both domestically and internationally with over 15 brand names under the Citigroup umbrella. Citigroup’s distribution channels are impressive, spanning worldwide to over 100 countries and their services are accessible all over the world via the Internet. Product Development, R&D Due to the fact that Citigroup is a financial services provider, they report no expenses in Research and Development for the previous three years (Annual report). This is consistent with the industry in which they operate. Their product development comes with the services they provide to customers and how they package and sell those services. Demographics Citigroup has a wide array of customers. They are extremely diversified in the products and services that they offer. They offer loans and banking services to everyone from low-income, sub-prime customers, to extremely high-wealth individuals and everywhere in between. Depending on the brand name, Citigroup will target specific demographics and cater their products to them. CitiFinancal focuses on community-based lending 8
  9. 9. where decisions are made at local branch offices. In contract, SmithBarney offers financial planning and advisory to high net worth clients. In general, Citigroup attempts to target a wide range of demographics and attempts to offer each group competitive packages and services. Threat of Substitution The threat of substitution for Citigroup is very small. The industry is very mature and the services provided have been around for years. Although the banking and financial services industry has gone through some consolidation, the services offered are mostly the same. The only threat that Citigroup faces is from competition in how the services are provided. Barring some new financial innovations, Citigroup must only worry about its competitors in service, not in products. Image Citigroup actively participates in marketing its image to the customer. Recently, they have taken an active role in aiding hurricane Katrina victims. They have pledged to donate up to $8.2 million from The Citigroup Foundation. Also, they will make an immediate $1 million donation and match any eligible employee donation dollar for dollar up to $3 million. However, Citigroup was involved in legal proceedings stemming from the WorldCom debacle. They were involved in a settlement worth $2.6 billion and that was approved in December 2004. This settlement is currently under appeal and no payments have been made to date. Management Quality Citigroup management is made up of a diverse set of individuals from varying backgrounds in finance and banking. It senior management team consists of over 50 members all around the world. Its board of directors has substantial independence with individuals with backgrounds from ex-chairman at ChevronTexaco to one ex-President of the United States. Managements’ most recent success in 2004 included a major revamping of its corporate governance systems. Its goal was to increase independence with a commitment to have two thirds of the board designated as independent. They accomplished this goal and at the end of 2004, 70% of the board was independent. Citigroup’s future prospects are to continue to expand globally and increase their distribution to growing markets. By creating a global presence, they believe that it will contribute to meeting the needs of the local communities as well as attract foreign capital and investment. VI. Financial Statement Analysis 9
  10. 10. Accounting Procedures • Inventory Valuation- Citigroup is a banking and financial services provider therefore they do not carry inventory on their balance sheet. • Depreciation- Citigroup has taken depreciation of over $2 million in 2004 from a variety of sources but mainly from operating leases, premises, and equipment. No accelerated depreciation was taken in 2004 or 2003 but $8 million was taken in 2002 due to restructuring initiatives. • Investments Valuation- Other investment activities are primarily carried at fair value with impairment write-downs recognized in income from “other than temporary declines in value.” • Intangibles- Citigroup amortizes intangibles over the period of their useful life, unless their useful life is deemed infinite. • Pension Plans- The company has several non-contributory defined benefit pension plans and various defined benefit plans. Financial Ratios Trend Analysis (Citigroup vs. S&P 500) Looking at the year to date chart for price changes we see that Citigroup has underperformed the S&P at every interval throughout the year. In the current month to date, Citigroup’s price change is less the S&P by approximately 15%. Citigroup vs. Industry & S&P 500- 5 most recent days (as of Sept. 14th) 10
  11. 11. Here we notice that Citigroup has recently outperformed both the industry and the S&P 500. This could be due to the announcement of the sale of one of their subsidiaries, Legg Mason, to Stifel in a $95 million deal that took place on September 12, 2005. Direct Comparison to Industry and Competitors DIRECT COMPETITOR Deutsche COMPARISON Citigroup Bank America Bank AG J.P Morgan C BAC DB JPM Industry Market Cap: 233.27B 171.16B 43.05B 120.81B 16.40B Employees: 287,000 175,742 65,417 160,968 23.70K Qtrly Rev Growth (yoy): -4.20% 3.10% 11.20% 44.20% 8.10% Revenue (ttm): 80.82B 53.36B 27.74B 48.39B 5.71B Gross Margin (ttm): N/A N/A N/A N/A 0.00% EBITDA (ttm): N/A N/A N/A N/A N/A Oper Margins (ttm): 52.18% 57.44% 33.03% 38.18% 48.69% Net Income (ttm): 20.94B 16.59B 3.59B 6.31B 1.02B EPS (ttm): 4.041 4.045 6.946 1.761 1.96 P/E (ttm): 11.17 10.53 13.36 19.53 15.87 PEG (5 yr expected): 1.02 1.1 0.88 1.17 1.34 P/S (ttm): 2.89 3.21 1.53 2.48 3.23 Source: Citigroup is by far the largest of its competitors in terms of market capitalization and revenues. Its operating margins are strong but not better than Bank of America’s. We can see that Bank of America makes $0.57 operating income for every $1 revenue, while Citigroup makes only $0.52. In comparing the revenue growth, we see that Citigroup has negative revenue growth compared to the previous year. All other competitors, as well as the industry, have had positive revenue growth for the same period. This could be a signal that Citigroup has exhausted all of its revenue opportunities or that something else is causing their revenues to decrease. 11
  12. 12. VII. Financial Forecasts (from analysts) Revenue forecasts (from Earnings estimate (next quarter Dec. 2005) $1.02 Revenue estimate (next quarter Dec. 2005) $21.60B Growth estimate (current) -3.6% EPS trends Earnings Trends Current Quarter Next Quarter Current Year Next Year Current Estimate $0.98 $1.02 $4.04 $4.42 7 days ago 0.98 1.03 4.04 4.43 30 days ago 0.98 1.03 4.05 4.43 60 days ago 1.03 1.07 4.15 4.57 90 days ago 1.04 1.08 4.20 4.62 Source: Looking at previous EPS estimates we can see that over the past 90 days, Citigroup’s earnings estimates have been adjusted down significantly. For example, 90 days ago the EPS estimate for next quarter was $1.08. Today, the current estimate is for next quarter is $1.02. This is also consistent when analyzing the trends for year over year estimates. This could signal a potential problem at Citigroup. For some reason, analysts expected earnings to be higher and have since re-adjusted those estimates to lower numbers. This a cause for concern for Citigroup’s stock price because the market pays close attention to whether or not a company meets it earnings estimates. Growth Estimates and Trend Analysis Source: Growth Estimates C Industry Sector S&P 500 Current Qtr. -3.90% 6.80% N/A 17.60% Next Qtr. 0.00% 9.40% N/A 15.50% This Year 0.00% 6.30% N/A 14.40% Next Year 9.40% 9.20% N/A 11.40% Past 5 Years (per annum) 10.50% N/A N/A N/A Next 5 Years (per annum) 11.00% 10.08% N/A 10.63% Price/Earnings (avg. for comparison categories) 11.3 12.22 N/A 16.16 Currently Citigroup’s growth estimate for this quarter is -3.90%. Compared to the industry and the S&P 500, this is significantly lower. It is also worth noting that estimates of growth for next quarter and subsequently the entire year show no sign of 12
  13. 13. growth. This tends to support that the current and near future appear bleak for Citigroup. Especially when comparing their growth estimates to that of the entire industry and the S&P 500. VIII. Analysis of Risk Citigroup Inc is traded on the New York Stock Exchange as ticker symbol “C” and appears in many indexes. These indexes include the Dow Jones Composites, Dow Jones Industrials, S&P 100, S&P 500, and the S&P 1500 Super Composite ( During the last three months the average trading value for Citigroup Inc. was 15,625,600 shares daily ( During the last 12 months the low share price was $42.10 and the high was $49.99 ( The standard deviation, or relative risk, was measured at approximately 1.80 with a correlation of 0.115706 (see chart below). The Beta with market/industry is 1.17 over the last 36 months or 1.28 over the last 60 months (Factiva Report). Marketability a. Trading Location – NYSE (C) b. Average Volume – Last 3 months 15,625,600 Total Risk c. Range 52 week range 42.10 – 49.99 d. Standard Deviation 1.79 Systematic Risk e. Correlation to market/industry 0.12 13
  14. 14. Observation X Mean (X-M) (X-M)2 Market Jan-04 46.84 45.3081 1.5319 2.346718 1131.13 Feb-04 47.58 45.3081 2.2719 5.16153 1144.94 Mar-04 48.94 45.3081 3.6319 13.1907 1126.21 Apr-04 45.9 45.3081 0.5919 0.350346 1107.3 May-04 44.32 45.3081 -0.9881 0.976342 1120.68 Jun-04 44.39 45.3081 -0.9181 0.842908 1140.84 Jul-04 42.47 45.3081 -2.8381 8.054812 1101.72 Aug-04 44.87 45.3081 -0.4381 0.191932 1104.24 Sep-04 42.5 45.3081 -2.8081 7.885426 1114.58 Oct-04 43.13 45.3081 -2.1781 4.74412 1130.2 Nov-04 43.5 45.3081 -1.8081 3.269226 1173.82 Dec-04 46.84 45.3081 1.5319 2.346718 1211.92 Jan-05 47.68 45.3081 2.3719 5.62591 1181.27 Feb-05 46.81 45.3081 1.5019 2.255704 1203.6 Mar-05 44.08 45.3081 -1.2281 1.50823 1180.59 Apr-05 46.49 45.3081 1.1819 1.396888 1156.85 May-05 46.64 45.3081 1.3319 1.773958 1191.5 Jun-05 45.77 45.3081 0.4619 0.213352 1191.33 Jul-05 43.5 45.3081 -1.8081 3.269226 1234.18 Aug-05 43.77 45.3081 -1.5381 2.365752 1220.33 Sep-05 45.45 45.3081 0.1419 0.020136 1237.91 951.47 67.78992 Mean 45.3081 Standard Deviation = 1.796689 Correlation with Market 0.115706 f. Beta with market/industry 1.17 (36 Month) 1.28 (60 Month) (Factiva Report) IX. Fundamental Valuation Estimation of Required Rate of Return The required rate of return has been estimated from a series of data over the previous nine years. We use the assumption here that what has happened in the past has a reasonable change to continue in the future. The S&P 500 has been used as a proxy for the market. Also, we use historical rates on the 1-year T-bill as an estimation of the risk free rate of interest. For the periods 1995-2004 the historical equity premium on the market was 6.38%. This is a geometric mean average rate of return. In order to compute the required rate of return for Citigroup we used the Capital Asset Pricing Model: RE = RF+ β(Equity Risk Premium) 14
  15. 15. RE = 4.3 + (1.28) (6.38) = 12.46% Dividend Yield Date DPS Share Price Dividend Yield S&P 500 Yield 2000 0.52 1.02 2001 0.6 50.48 1.189% 1.19 2002 0.7 35.19 1.989% 1.55 2003 1.1 48.54 2.266% 1.39 2004 1.6 48.18 3.321% 1.43 Forward annual dividend yield 3.90% Trailing Annual Dividend Yield 3.82% *Dividend yields calculated based on the annual dividend paid by Citigroup. Valuation The valuation techniques that were used include, but are not limited to: 1) estimating future dividends with constant growth, 2) the value of a stock using the constant growth model, and 3) estimating the growth rate. 1. Future Dividends w/ Constant Growth Dt=Do*(1+g)^t 2.07248 2. Value of Stock Using the Constant Growth Model V=D*(1+g)/ k-g 39.08740955 3. Forecasted Growth Rate g=(1-p) * ROE 8.0376 Financial Summary A brief snapshot of financial performance and relevant ratios includes: (as of Sept. 13, 2005) Note: Information in table used for valuation, see page 1 for up-to-date figures. 15
  16. 16. General Information Stock Price 45.01 Market Capitilization 230,637,300 Beta 1.280 EPS 3.260 DPS 1.600 P/E 11.00% Dividend Yield 3.82% Dividend Payout Ratio 49.10% Required Rate of Return 12.70% ROE 15.76% Forecasted Growth Rate 8.04% PE Ratios 5 Yr. High P/E Ratio 21.1 5 Yr. Low P/E Ratio 7.7 5 Yr. Avg. P/E Ratio 15.2 P/E Ratio: 1 month Ago 10.8 Growth Rates 5 yr. R Sq. of 5 yr. Growth Rate Revenue 0.69 1.8 Income 7.42 88.6 Dividend 29.53 94.6 X. Other Considerations Benjamin Graham Stock Selection Criteria (as of 9-14-05) AAA bond yield- 5-yr: 4.08; 10-yr: 4.6; 20-yr: 5.11 1. An earnings-to-price yield at least twice the AAA bond yield. [Earnings-to-price: 3.26/44.61=.073 (EPS/stock price)] Passes Criteria: 7.3 < 8.16(2×4.08) 2. A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years. [P/E: 11 ttm; 5-year high P/E: 21.1] Fails to Pass Criteria: 21.1×.4=8.44 > 11 3. A dividend yield of at least two-thirds the AAA bond yield. [3.96%] Passes Criteria: 3.96% > 4.08×⅔=2.72 4. Stock price below two-thirds of tangible book value per share. [Price: $44.66; Tangible Book-Value per share: 12.72] Fails to Pass Criteria: 44.66 > 12.72×⅔=8.48 5. Stock price two-thirds "net current asset value." [Current Assets – Liabilities: 572,407,000,000-1,374,810,000,000=-802403000000] 16
  17. 17. Unable to Test Criteria: Undisclosed Inventory and Other Current Assets 6. Total debt less than book value [Total Debt: 274,677,000,000; Book Value: 109,291,000,000] Fails to Pass Criteria: 274,677,000,000 > 109,291,000,000 7. Current ratio greater than two. Unable to Test Criteria: Current ratio not reported (undisclosed Inventory and Other Assets) 8. Total debt less than twice "net current asset value. [Total Debt: 274,677,000,000; NCAV is negative] Unable to Test Criteria: Undisclosed Inventory and Other Current Assets 9. Earnings growth of prior ten years at least 7 percent on an annual basis. [2003-2004: -.0452; 2002-2003: .1687] Fails to Pass Criteria: Negative Earnings Growth (2003-2004) 10. Stability of growth of earnings in that no more than two declines of 5 percent or more in the prior 10 years. [2003-2004: -.0452; 2002-2003: .1687] Fails to Pass Criteria: .1687+.0452=.2139 Top Institutional Holdersª Holder Shares % Out Value* Reported STATE STREET CORPORATION 269,739,905 5.19 $12,122,111,330 31-Mar-05 BARCLAYS BANK PLC 263,363,638 5.06 $11,835,561,891 31-Mar-05 AXA 169,337,195 3.26 $7,610,013,543 31-Mar-05 WELLINGTON MANAGEMENT COMPANY, LLP 146,412,617 2.81 $6,579,783,007 31-Mar-05 FMR CORPORATION (FIDELITY MANAGEMENT 125,943,281 2.42 $5,659,891,048 31-Mar-05 & RESEARCH CORP) VANGUARD GROUP, INC. (THE) 115,412,655 2.22 $5,186,644,715 31-Mar-05 CAPITAL RESEARCH AND MANAGEMENT 102,669,865 1.97 $4,613,983,733 31-Mar-05 COMPANY JP MORGAN CHASE & COMPANY 83,564,668 1.61 $3,755,396,179 31-Mar-05 NORTHERN TRUST CORPORATION 71,557,740 1.38 $3,215,804,835 31-Mar-05 Mellon Financial Corporation 66,852,263 1.29 $3,004,340,699 31-Mar-05 Top Mutual Fund Holdersª Holder Shares % Out Value* Reported 17
  18. 18. VANGUARD 500 INDEX FUND 48,853,394 .94 $2,353,756,522 31-Dec-04 COLLEGE RETIREMENT EQUITIES FUND- 35,846,198 .69 $1,727,069,819 31-Dec-04 STOCK ACCOUNT FIDELITY MAGELLAN FUND INC 34,465,753 .66 $1,548,890,939 31-Mar-05 WASHINGTON MUTUAL INVESTORS FUND 30,808,500 .59 $1,384,533,990 31-Mar-05 SPDR TRUST SERIES 1 22,761,117 .44 $1,004,220,482 30-Sep-04 VANGUARD INSTITUTIONAL INDEX FUND- 22,251,293 .43 $1,072,067,296 31-Dec-04 INSTITUTIONAL INDEX FD VANGUARD/WINDSOR FUND INC. 22,090,246 .42 $1,083,526,566 31-Jan-05 VANGUARD TOTAL STOCK MARKET INDEX 19,750,906 .38 $951,598,651 31-Dec-04 FUND DAVIS NEW YORK VENTURE FUND 19,097,316 .37 $936,723,349 31-Jan-05 VANGUARD/WINDSOR II 18,997,673 .37 $931,835,860 31-Jan-05 ªSource: Major Holders – *Value shown is computed using the security’s price on the report date given XI. Conclusion After evaluation of the data presented in this paper, the analysts have some concerns about Citigroup’s performance. There are many positive aspects of Citigroup’s business that are attractive for investors. They are the largest company in the money center bank industry with a market capitalization of 234.51B and revenues totaling 80.82B. They have a global focus and offer services in over 100 countries. For the period 2000-2004 Citigroup has had compound annual growth rate of 8% in net revenues. For the same period, their income from continuing operations grew at 9% compounded annually. They have recently sold off one of their subsidiaries, Legg Mason, to Stifel which has increased the share price slightly since then. Also, Citigroup has gained publicity from its involvement in hurricane Katrina clean-up efforts by pledging financial resources to aid victims of this disaster. Taking a closer look into this company, however, there is some information which may paint a different picture as to the future of Citigroup as an investment. Recently, Citigroup’s growth as slowed and its projected growth estimate for the current quarter is -3.09%. Compared to the industry expected growth for the same period of 6.8% and the S&P 500 expected growth of 17.6%, this is not a good sign for Citigroup. This trend of no growth is expected to continue for the rest of the year. Analysts do, however, expect Citigroup to rebound with 9.4% growth next year. Another factor to look at is the earnings estimates for the current and upcoming quarters. The current estimate of earnings for this quarter is $.98, down from this same quarter’s estimate 90 days ago of $1.04. As stated in the Financial Forecasts section of this report, this trend is consistent for the remainder of the year and next year. This is a bad signal 18
  19. 19. for Citigroup because much attention is paid by investors to earnings estimates. A decrease in the estimate, and subsequently not meeting the estimate, is a negative signal for the company. The Beta of Citigroup is 1.28 so it is more risky than the market. Thus, when the market is up, we should expect Citigroup to be up by more than the market. This has not been the case over the past year. In the chart showing a comparison of price changes of Citigroup and the S&P, we can see that Citigroup’s actual price performance has been significantly below that of the S&P. This must be due to some firm specific factors that are causing the company poor price performance. Citigroup has also taken a hit on its corporate image in recent years due to some corporate governance issues and scandals relating to WorldCom and Enron. Although they have been compliant with SEC regulators, this still reflects poorly on them and reduces investor confidence. In looking at the fundamental analysis, using the constant growth model, the value of Citigroup’s stock should be trading at $39.08. This is derived assuming a required rate of return of 12.46% and a dividend growth rate of 8.036%. The value that we have calculated is currently less than what the stock is trading for; $45.36. Upon considering the ten rules developed by Ben Graham (the Ben Graham Criteria), it quickly becomes apparent that Citigroup fails to meet the reward and risk criteria. Rules one thru five consider the reward associated with the stock and rules six thru ten consider the risk of the stockiii. It was not possible to analyze three of the criteria due to undisclosed inventory and other assets. Of the seven criteria analyzed: five failed to pass, while just two passed (the two that passed the criteria were in the reward criterion). It goes without saying that Ben Graham would not invest in a company that failed five of the ten criteria (giving the benefit of the doubt to the three criteria that were undefined). Recommendation As for the recommendation on Citigroup as an investment it is difficult to determine whether to buy or sell due to the conflicting analysis presented above. There are many signs indicating that Citigroup is a strong company with excellent future prospects. However, there are again some signals Citigroup may be a bad investment. Given the limitations of the timing of this investment report, our recommendation is to hold this stock. From the data presented here we believe that Citigroup is struggling currently but has bright long-term prospects. 19
  20. 20. Disclaimer: This analysis does not necessarily reflect the beliefs of the University of Missouri-Columbia or the College of Business. The insights and opinions are of the students of Investment Funds Management and should not be used in personal investment decisions. The University of Missouri and the authors of this analysis take no responsibility for the validity of the valuation and analysis. 20
  21. 21. i Source: CoreData, Inc. ii Information regarding Citigroup Subsidiaries obtained from Citigroup Inc Form 10-Q (06/30/05) iii Source: http://sherlockinvesting/com/articles/pv200011.htm