On June 23rd, 2022, I submitted a post on here and on the Investing sub titled “How on Earth is Citi's Stock Price so Low!?”:
Link to post on Investing sub:
Link to post on this sub:
I strongly recommend reading through what I wrote and also some of the comments in the Investing Sub post. I basically made a case for buying Citi since it seemed ridiculously underpriced. I backed my predictions with DCF analysis and such.
Anyways, I'm posting this because it seems that many of my predictions have since come to fruition. For some reason, many believed that Citi's Q2 financials would be underwhelming due to inflation and such. Therefore, in the weeks before Citi released their Q2 financials, Citi's stock price fell to prices as low as $43/share. However, as I pointed out in my original post, rising interest rates are good for banks like Citi. Then on July 15th, 2022, Citi released their Q2 financials and the stock price has since soared from $43/share to prices currently around $52/share. Citi's Q2 performance wildly exceeded expectations, largely due to rising interest rates being profitable for them.
I apologize if this comes off as conceited. I don't mean to brag.
However, even with this sudden spike in price, it still seems a bit undervalued. In my original post, using DCF Analysis, I arrived at an “intrinsic value”/intrinsic share price of $254.68/share. Not only that, but even in my “worst-case scenario” future free cash flow projections, I still arrived at an “intrinsic value” of $56.55/share. Both of these values are higher than the current share price.
However, as many comments in the original thread pointed out, it's probably not a good idea to use DCF analysis to value banks. Many suggested using the dividend discount model (DDM) instead. Using the DDM model, I came up with an intrinsic value of $70.16/share, which is far closer to the actual price. But that still means that the stock is still moderately undervalued.
Many in that thread also suggested other methods to calculate an intrinsic value such as P/E and P/B. Seeking Alpha multiplied consensus analyst estimates for FY22 by the average valuation multiples for P/E, P/B, and P/TBV of Citi and its peers, and calculated a price target of $81.13/share. For some reason, Seeking Alpha links are not allowed on this sub, but this can be found in the Seeking Alpha article titled “Citigroup Q2 Earnings: Outperforming Peers And Expectations”
They also seem to agree that the stock is still undervalued.
However, there are some reasons why Citi might not be a good buy. This year, Citi decided to freeze its dividend hikes to build its capital buffers. This stagnating dividend may deter investors from this stock despite their financials improving. However, its dividend yield is still at 3.92%, making it one of the highest in the industry. But this dividend freeze is due to a relatively poor Stress Test results, with Citi displaying lackluster capital buffers. This is a reason to think more carefully before deciding whether to go all in on Citi. But that seems like a minor issue in the grand scheme of things.
Warren Buffett recently invested an enormous amount of money into Citi. His “stamp of approval” bodes well for the future of this stock.
Overall, Citi is still a good buy. It would be very surprising if its price does not increase to $80+ in the near future. What do you guys think? Is Citi a good buy?
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