Chasing Value: When Will Citigroup Buy Back Shares?

It fell more than 5% in one day when the overall market barely moved the needle. The closing price was $4.61, down 25 cents on the day. However, after the recent run-up during the past two weeks, the shares probably needed a breather. In any event, the GOP blocked passage of the reform bill in the afternoon sending it back to the drawing board and nudging bank stocks up slightly in after-hours trading. So how do we value the stock now?

It's hard to use normal metrics for a stock weighed down by dilution, huge debt, a negative P/E ratio, and until recently negative growth and the dismantling of the world's premier bank. Citi did beat consensus earnings last week and one could crack a smile and be a little cheerful at that, along with the low P/S of 0.36 and P/B of 0.77. In another time this would be a highlight, but now we can only view these figures cynically.

At times like these I have to find a different way and get out the overused back of the napkin again. So I will think out loud, or in text as the case may be, to decipher this puzzle.

I start by examining the following ten-year chart. Note that prior to the financial melt down, the stock spent 80% of the period hovering around $50 per share. It also was earning a good return, paying a nice dividend and could be found on the recommendation list of many advisers and pundits who are still scraping egg off their faces today.

Having lost 95% of its value through last March 2009, the company shares only recently have approached $5. Consider the irony of celebrating this milestone at a point where we are getting giddy that the former largest bank in the world is now only down 90%.

But I have been buying and for now I am up considerably. Here is the value proposition today and to accept my scribblings you have to understand the idea of normalized earnings and ignore current earnings though appreciating the positive trend. When Citigroup was worth $50, it had twice the resources. If the company today only has half the resources (it has more but I must be conservative when using my old napkin), then its normalized earnings will only be half.

If the company and its earnings have been cut in half, then the best case for the stock price might be half as well, or $25 a share. But we also have to consider that the $50 stock price was relative to a company with half as many shares. This equates to 50% dilution and halves our potential stock price again to somewhere around $12.50 a share.

It isn't hard to believe that Citigroup shares will someday return to a figure that is 25% of its pre-recession value, but when is that day? That is the multibillion dollar question. The truth is I have no idea for sure and I would be very skeptical of anyone that told you they did.

My best guess is that it took 2.5 years to get where we are now and it will take at least that long to get back to "normal," meaning that sometime in late 2012 or early 2013 you might see Citigroup approaching $12.50 a share, at the soonest. I do not anticipate the market making a big move up during this period and that is why I have been buying the stock and selling to open puts taking piles of cash. I think it will be easy for Citigroup to beat the market and it should be a good investment if it only doubles in the next 2.5 to 3 years.

I also think that sometime during this period we will see a share buy-back program in place, cash-flow permitting, sooner rather than later and this will add confidence. Besides, if the board waits to long they will just have to pay more. I hope they have gained some wisdom through all the trauma.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.