| BUSINESSWEEK ONLINE : JUNE 7, 1999 ISSUE | ||||||
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| COVER STORY
A Financial Powerhouse--But for Your Portfolio? Citigroup could be a solid long-term holding, and its price is getting more attractive In some ways, this hardly seems the time to buy stock in Citigroup (C), the global financial powerhouse formed by the merger of Travelers and Citicorp. Bank stocks have been falling in recent weeks, haunted by the specter of rising interest rates and worries about the impact of the Year 2000 computer problem. Plus the jury is still out on whether co-CEOs John S. Reed and Sanford I. Weill can achieve all the benefits promised from the epic merger. However, Citigroup is the kind of core holding in a long-term portfolio that makes sense to buy when its stock price dips. From a high of 77 5/8 on Apr. 29, Citigroup shares have fallen 18%. The stock closed on May 27 at 63 3/8, down 1 5/16 points on a day when the Dow Jones industrial average fell 235 points. Citigroup is one of the favorite holdings of Richard Moroney, co-manager of the Strong Dow 30 Value Fund (up 17% this year, vs. 10% for the S&P 500). He ranks it in the top 10 out of the 30 stocks in the Dow for value. (He uses a range of measures, including comparing its current price-earnings ratio to its own trading history and the S&P 500.) "More importantly, it is a stock we feel has good profit growth prospects over the next 18 months," he says. He cites a rebound in Asia, continued cost-cutting, and growth opportunities from cross-selling financial services between the company's banking and brokerage divisions. "Citigroup has a huge reach, and with Asia coming back it could be a boon for the company," says Mark Halperin, portfolio manager of the Federated Global Financial Services fund, which has Citi as its No. 1 holding. "GREEN LIGHT." "If you believe that interest rates shouldn't rise much higher from here and that the market is in the first inning of a rotation from higher p-e growth stocks into more attractively priced value stocks, those factors flash a green light for financial stocks," says David C. Sowerby, a portfolio manager with Loomis, Sayles & Co., who subscribes to that scenario. "If you like the financial group, Citigroup is one of the more attractive banking stocks," he says. Last quarter, Citigroup showed surprising strength, stunning Wall Street with earnings that far exceeded expectations. Citi reported profits of $2.4 billion, or $1.04 a diluted share, when analysts surveyed by First Call Corp. forecast earnings of only 87 cents a share. Strong gains came from Citi's global consumer businesses (including credit cards, banking, and insurance), its global corporate and investment banking divisions (especially at Salomon Smith Barney), and its worldwide asset management division. Many investors were impressed that Citigroup's CEOs said the company had already "taken the actions necessary" to save $900 million out of the targeted $2 billion annually. Analysts expect the company to report earnings of 96 cents a share for the quarter ending in June, and $3.92 for all of 1999. But Halperin is a little worried about Citi's prospects in the year's second half. Recently, analysts have raised Y2K as a cause for concern about banking stocks. While Citigroup says it will be ready for the date change, some of its suppliers and customers in emerging nations may not be. Also in the second half of the year, trading revenues may slow as investors take pains to make sure all trades are settled before yearend, says Halperin. SHORT-TERM PAIN. The big fear is that the Federal Reserve Board will raise interest rates. For Citigroup, higher rates would slow trading revenues and reduce profits at Salomon Smith Barney and the asset management division. A rate hike also could hurt emerging markets. "The recovery is very fragile, and raising rates could send the patient back into intensive care," says Halperin. But all banks, indeed most sectors of the market, would fall if rates rise. Some investors believe that Citi could weather a rate hike better than many of its banking rivals. Maroney says higher rates would cause short-term pain but that Citi should continue to perform well. "If rates are going up because the global economy is improving and demand for money is growing, then improving balance sheets overseas and falling loan losses should offset that to some extent," he says. Banks have become much better at managing interest rate risk in their businesses, adds Sowerby. "It is more a matter of sentiment than reality," agrees Guy Elliffe, director of research at Jurika & Voyles, who concedes that he is "a little nervous" about the potential for interest rates to rise. Although he credits Citigroup for being "very well positioned," he says "it's just not quite cheap enough for us." The stock could get a near-term lift when its splits 3-for-2 on May 28. But most investors may wait until the interest rate picture clears. If rates continue to rise, Citigroup stock will undoubtedly get less expensive. If you're brave enough to start buying into a downturn, that could prove a good time to add a global financial powerhouse to your portfolio. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Citigroup: Is This Marriage Working? COVER IMAGE: Citigroup: Is This Marriage Working? TABLE: How Reed Thinks Citigroup Is Doing CHART: The Synthetic Citigroup TABLE: Weill's Management Rules CHART: The New Citi: How the Numbers Shape Up Weill: ``I Have No Problem Being a Partner with John'' Reed: ``The Culture Will Take Care of Itself'' ONLINE ORIGINAL: A Financial Powerhouse -- But for Your Portfolio? INTERACT E-Mail to Business Week Online | |
