Citigroup earnings preview

Posted Apr 13th 2007 3:30PM by Peter Cohan
Filed under: Earnings Reports, Citigroup Inc. (C), Morgan Stanley (MS)

Citigroup Inc. (NYSE: C) is scheduled to report first quarter earnings on April 16. I think it will miss its projected first quarter EPS forecast of $1.09 by a penny. After all, C missed by a penny in the fourth quarter of 2006 -- back then analysts expected C to earn $1.04 and it actually earned $1.03.

Then again, in 2006's first quarter, C exceeded expectations by 8.8% -- earning $1.11.

So will C's Q1 2007 earnings relative to expectations be more like its most recent quarter or last year's first quarter? In a beat-and-raise market, a company's stock will plunge unless its reported earnings exceed expectations and it raises its guidance.

Citigroup's basic problem is that its costs are growing faster than its revenues. In Q4 2006, Citigroup's revenues rose 15% to $23.83 billion while its expenses increased 23%. And as investors consider Q1 2007, they should focus on two concerns:

Layoffs. Citigroup announced on April 11 that it was firing 17,000 employees and taking a $1.38 billion pre-tax charge. Citigroup will take an additional $600 million in pre-tax charges spread during the last three quarters of the year and will move another 9,500 jobs to lower-cost locations. While these moves should make a dent in its cost problem, it remains to be seen how it will affect its future earnings growth.
Lack of management depth. MarketWatch reports that Citigroup is expected to announce an $800 million deal for Old Lane LP, a hedge fund, run by former Morgan Stanley (NYSE: MS) executive Vikram Pandit. Citigroup's idea is that Pandit will head its Alternative Investments Division. I think this is a hefty price to pay for management talent and I wonder whether Citigroup can earn back the price.
Subprime. Citigroup is exposed to the collapsing subprime mortgage market. What I don't know is how much that exposure will damage its earnings. However, I do know Citigroup is a big player in the mortgage market. According to Reuters, its mortgage unit CitiMortgage made $50.6 billion of loans between October and December, ranking third in the U.S.. CitiMortgage announced last week that it would limit no-money-down second mortgages and raise the minimum credit scores needed to obtain them. This suggests that it has had credit problems which are likely to show up in the first quarter earnings announcement.

I think Citigroup investors will suffer from the report. But Citigroup is looking cheap. It trades at a Price Earnings/Growth (PEG) ratio of 1.01 -- a forward P/E of 11.5 divided by 11.44% earnings growth to $5.01 in 2008 -- and sports a dividend yield of 4.17%.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.

Tags: C, MS