Friday, June 10, 2011

Is Citigroup Stock Dirt Cheap?

Citigroup (NYSE: C) -- the $110 billion market capitalization financial services behemoth whose stock trades 92% below its May 2000 split-adjusted-high of $466 -- decided to reveal that hackers broke into its computers and got access to confidential information on 200,000 of its credit card customers. While this is certainly bad news for them, should it keep you from buying Citigroup stock?

Citigroup found out that these customer accounts had been hacked in May but just started letting customers know about it this month. But the New York Times reports that the information on each cardholder ought not to inconvenience those cardholders much.  Although the thieves got customer names, card numbers, addresses, and e-mail details they did not steal customers' Social security numbers, expiration dates and the three-digit code on the card's back.

Although this news is bad for Citigroup, it can take comfort in knowing it's not alone when it comes to hacking into electronic accounts. Identity Theft Resource Center reports that since 2005, financial services companies have publicly disclosed 288 publicly breaches that exposed no fewer than 83 million customer records. 

Not only that, but the cost of fraud has dropped dramatically in the last 19 years. In 1992, Nilson Reports said banks lost 15 cents to fraud for every $100 charged. Since 2005, that figure is down 66% to 5 cents for every $100. While credit card companies set up security standards in 2005, "compliance with those rules has been mixed," according to the Times.

Despite this bad news for Citigroup, it is unclear how many of its credit card customers will bolt to another issuer since there does not appear to be an obvious provider that is 100% impervious to hackers.

Meanwhile, Citigroup, the $77 billion (2010 revenues) that completed a 10-for-1 reverse stock split on May 6, reported slightly better than expected first quarter results. Its $3 billion net was down 32% from the year before, but its 10 cents a share EPS beat by a penny 21 analysts surveyed by Bloomberg.

The report contained a mixture of good and bad news. The good news was that this was Citigroup's fifth profitable quarter in a row and its losses from bad loans fell 25% as fewer customers missed payments  than the year before's first quarter. The bad news was that profits in its trading and investment-banking businesses tumbled almost 50% and revenue was down in all but one of its six business units.

Does Citigroup's profit mean it's time to buy its stock? To think about that, we can look at their price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.

At a PEG of 0.45, Citigroup looks cheap. Citigroup's P/E is 12.2 and its earnings are forecast to grow 27% to $5.37 in 2012 after growing 21% this year. If Citigroup can keep beating analysts' expectations, its stock price has a chance to rise from its current low level.


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