Is there a stock as ridiculously underpriced as Citi (C)? Before the 2007-2008 crisis, Citi was trading at around $500/share and then abruptly crashed down to prices as low as $15/share before moderately rebounding to around $40/share in late 2009. Since 2009, Citi has been trading within the range of $40-$80/share despite enormous growth in the company's financials. Citi currently trades at roughly $50/share despite yielding annual free cash flows (FCFs) which are far, far, far greater than they ever did when its stock price was roughly $500/share. They had FCFs of ~$57 billion in 2021! And the 2022 Q1 report makes the rest of the year look extremely promising. If you took their Q1 2022 Net Income, “extrapolated” that figure for the entirety of 2022 by multiplying it by 4, and assumed the same Net Income/Free Cash Flow ratio as seen in 2021, you'd get a FCF number equal to around $44 billion! Both their actual 2021 FCF figure and this 2022 estimate are drastic improvements from prior years. But keep in mind that this “back-of-the-envelope” estimation calculation is most likely an underestimation for one big reason:
RISING INTEREST RATES
Banks make more money when interest rates rise. The Fed is raising and will continue to raise interest rates to recent records to combat the recent bout of inflation. Banks such as Citi stand to gain enormously from this.
Yet for some reason, the Fed's announcement of interest rate hikes in March barely had an effect on Citi's stock.
EDIT: Additionally, Warren Buffett recently invested an enormous amount in Citi, but that had very little effect on its stock price.
Every single DCF model I've seen of Citi yield Equity/Share values that are far, far, far higher than what the stock is currently trading for. Analysts widely seem to agree that Citi is undervalued and has been for several years.
Just for fun, I took the Free Cash Flows generated by Citi from 1989-2021 and used the Excel forecast function on that data to create a forecast for the next 10 years within a 95% confidence interval. Thereafter, I took those FCF forecasts and used the “terminal value” method to come up with a NPV Enterprise value for the company (assuming a 5.5% WACC, as calculated by valueinvesting.io). I took this figure and subtracted the company's net debt to arrive at an equity value for the company. Afterward, I took this equity value and divided it by Citi's shares outstanding. This is essentially how DCF models calculate a stock's “intrinsic” price. I got an “intrinsic” price of $254.68/share.
But that's not all! I also did the same thing but used the FCF forecasts from the Lower Confidence Bound (meaning Excel is 95% sure that the actual values will be higher than these values). Thereafter, I averaged the results from the median forecast and the worst-case scenario (as it is extremely unlikely that Citi will actually yield FCF of around -$35 billion for every single year for the next 10 years). Averaging the median forecasts and the worst-case forecasts, I got an “intrinsic” price of $56.55/share! Keep in mind that this is basically the most realistic worst-case scenario for Citi's future FCFs.
Citi is currently trading at $46.35/share.
I've done tons of DCF models and my “intrinsic value” figure always ends up being pretty close to the actual stock price. This is virtually the only exception. How on Earth is Citi only trading at $46.35/share!? How is that even possible!? Why isn't the stock price soaring?
Leave a Reply