Tuesday, March 12, 2013

Citicorp

At the end of last year - December 13, 2012, to be precise - I had the chance to talk for an hour over lunch with Erika Penala, U.S. Bank analyst at Merrill Lynch.

It was an unusual opportunity - normally lunches with top analysts are well-attended, particularly when the topic involves an area that has been so difficult to analyze over the past few years. Large group presentations don't easily lend themselves to discussion, which unfortunately means less chance to really focus on the investing issues.

But for some reason - the weather, the holidays, whatever - I was the only attendee that cold day in December. So I had the chance to grill Ms. Penala about her thoughts on the stocks she follows.

Her favorite stock that day was a surprise to me:  Citigroup (ticker: C).

Like many investors, I have always been wary of Citi.  The company has always been too big, too difficult to figure out, and of course had needed massive bailout money from the government during the last credit crisis.

Citi has actually failed three times in my career:  1982; 1997; and 2008.  Each time the government has had to come to its rescue, staving off demise from self-inflicted wounds.

So when Erika suggested that Citi was poised for a strong rebound in performance, I was naturally skeptical.

But over the course of our lunch, I began to understand Erika's enthusiasm for the Citi story.

She pointed to many factors that would help the stock. 

While the company was far from being clear of its credit issues, it had aggressively addressed its problems, selling off poor performing assets when possible or "ring fencing" others.

Headcount too was being drastically reduced, with further reductions likely.

And Citi had probably overreserved for future credit losses in the midst of the market meltdown of a few years ago; when these reserves were adjusted, earnings would benefit.

Erika was also high on new Citi CEO Michael Corbat.  Corbat is a Citi veteran, and had served the company in several capacities over his career.  Erika felt that he would bring a no-nonsense, bottom line discipline to a company long known for its profligacy.

Citi at the time was selling at 50% of book value, reflecting the market's skepticism on its future.  Erika felt that over time its stock price should move close to book value, which obviously promised big gains.

So after that luncheon, I took a look at the company myself, and started buying stock for clients.  Unfortunately, as is usually the case with good ideas, I was not aggressive enough, since Citi has since soared, but still her ideas helped performance.

Usually analyst thoughts do not work as quickly, but in this case Erika was right on the button with her thoughts. 

I had the chance to see CEO Corbat for myself last week at a conference here in Boston, and I was impressed.  I think Erika is right:  he seems to be the right man for Citi at this point.

Erika was in town yesterday for a another meeting with clients, but this time I was not so lucky:  her presentation was well-attended, with probably more than a dozen investors at the lunch.

She remains positive on Citi, but is obviously a little cautious on the next move for C after such a strong move in three months.  Many of the financial levers she anticipated have actually been either pulled or anticipated, and she worries that investor enthusiasm has gotten a little too frothy.

Still, she remains a fan, and thinks that Citi could easily hit the high $50's in a year (it is now trading at $47).