Citigroup still not out of the woods

Beating Wall Street's low expectations is nothing to brag about.

By Jonathan Berr Jul 16, 2012 11:45AM
Image: Wall Street sign (© Corbis/SuperStock)Shares of Citigroup (C) rose in early trading Monday after the Wall Street company reported better-than-expected quarterly results. The celebration, however, may be premature because the earnings were not great.

Net income at the New York bank fell 12% to $2.95 billion. Revenue fell 10% to $18.6 billion as investment banking revenue fell 21%. Excluding one-time items, earnings were $1, beating the 89-cent consensus Wall Street forecast. 

Investors need to remember that expectations for Citigroup and for JPMorgan (JPM), whose results last week also beat Wall Street forecasts, were not high to start with and the results were nothing special. For instance, Citigroup's mergers and acquisition advisory service saw revenue increase 2% to $201 million, while debt underwriting fell 21% to $486 million and equity underwriting plunged 39% to $167 million. Revenue at Citigroup's global consumer banking business was unchanged at $9.8 billion as gains from the U.S. were offset by declines in international business.

Last month, Moody's Investors Service slashed the rating of Citigroup and more than a dozen other banks, citing poor profits and an uncertain economic outlook. Though there seems to be some optimism about mergers and acquisitions and equity underwriting, these forecasts could be undermined if the economy continues to falter. Indeed, many experts argue that the economy in Europe may be getting worse.

If Citigroup can turn around its operations, business school students will study the company's turnaround for decades. Remember, it wasn't that long ago that pundits were calling for CEO Vikram Pandit to be fired and denounced the company as a hopeless basket case. Pandit, though, hasn't vanquished his naysayers yet. The next year or two will not be easy for anyone on Wall Street.

Citigroup certainly looks attractive on a valuation basis, however. It trades at a price-to-earnings ratio of 7.55. The average 52-week target price on the stock is $40.30, well above the $26.98 where it recently traded. While the potential rewards are huge, so are the risks. Most investors, except those with nerves of steel, should avoid Citigroup and other financial stocks for now.

Jonathan Berr does not own shares of the listed shares. Follow him on Twitter@jdberr.


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