At 7 this morning, Citigroup, Inc. (NYSE: C) released earnings of $1.03 a share that beat analysts' estimates by three cents. Initially the stock was up three cents in pre-market trading but by 9:36 a.m., C was trading down 27 cents. At 10 a.m., C will hold a conference call, the results of which will likely determine the trajectory of C's stock price.
This announcement illustrates the way the expectation game is played. As I've posted, for a stock to rise, its earnings must exceed expectations ("beat") and its management must increase its guidance for future earnings growth ("raise"). Last week analysts expected C to earn $1.06 a share but C said it would take a seven cents a share charge to restructure its Japanese consumer finance operations. By this morning, analysts' expectations had dropped to $1.00 a share -- making this morning's actual earnings much more appealing to investors.
In our readers poll, readers were nearly split on whether C would meet or beat expectations: 45% and 42%, respectively.
In my mind, there's a mix of good and bad news in the report. The good news here is that the stock did not collapse because C was able to tamp down analysts' expectations before releasing its earnings. I was also heartened by the 15% growth in total revenues to $23.8 billion, the 48% increase in net income at its US consumer business; the 21% rise in wealth management revenues; and the 10% increase in C's dividend as reported in the Wall Street Journal [subscription required].
Nevertheless, C's earnings were down 26% from the year earlier period because of a $2.1 billion gain on the sale of an asset management business last year. Without the gain, C earned 98 cents -- making today's announcement 5% above last years' result.
But my biggest concern is that C's operating costs grew 23%, 8% faster than revenues. And the deterioration in C's credit quality is a concern -- it raised by 10% its provision for credit losses to $2.3 billion in the fourth quarter from $2.1 billion in the third period of 2006. Finally, its trading results were weaker than rivals -- its fixed income trading revenues rose 35% and its equity markets revenue rose 17% -- both slower than growth at Merrill Lynch & Company, Inc. (NYSE: MER) and JPMorgan Chase & Co., Inc. (NYSE: JPM).
Will C be able to accelerate revenue growth and control its costs? More on this may emerge from this morning's conference call. Then we may know whether C beat-and-raised or beat-and-maintained.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, a Professor of Management at Babson College, and editor of The Cohan Letter. He owns Citigroup shares and has no financial interest in securities of Merrill Lynch or JPMorgan Chase.
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