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I last analyzed Citigroup (NYSE:) on Feb. 25, about 5.5 months ago. At the time, I chose a bullish rating for C, although there were some factors that suggested caution.
Since then, C has returned a total of 7.8%, compared to a 13.98% gain for the . During this period, there was Q1 on April 15 and Q2 on July 14, and earnings per share exceeded consensus estimates for both (by 39% for Q1 and 45% for Q2). In this post, I update my analysis and illustrate that the outlook for C is significantly better than in February.
C performance versus SPX since February 25, 2021
Source: looking for alpha
In February, the forward P/E for C was 10.2 and the stock had the lowest P/E of all the top ten positions of the iShares U.S. Financials ETF (NYSE:). Today, the forward P/E for C is 7.47 and the lagging P/E is still the lowest of IYF's top ten positions.
The substantial decline in the forward P/E, even if the share price has risen, shows that the earnings outlook has improved significantly since February.
C: Price history, basic statistics
Source: looking for alpha
Bank stocks typically show a significant positive correlation with interest rates and C is no exception. For example, C has followed people very closely over the past year (see graph below).
The expectation of rising interest rates is no small part of Citigroup's optimistic view. Inflation seems increasingly intractable and bond yields are starting to rise from their lows in July.
Adjusted closing price of C versus 10-year government bond yield
Data source: Yahoo! Finance
The outlook for Citigroup depends on corporate strategy, interest rates and the broader economy. Instead of building my own bottom-up analysis for C with my economic view, I rely on two forms of consensus view.
The first is the well-known consensus of Wall Street analysts. The consensus price target appears to have predictive value if the spread between the analysts is not too large.
The second form of consensus I look at is the market implied outlook derived from options prices on a stock. The market implied outlook represents the consensus estimate of the probability of price returns reflected in option prices at a range of strike prices. For those unfamiliar with the concept of the market implied outlook, I have written an overview with examples and links to the relevant financial literature. I've applied this technique in articles on a wide variety of stocks.
Wall Street Analyst Consensus Outlook
eTrade's version of the Wall Street consensus combines the views of 8 ranked analysts who have reviewed ratings and ratings over the past 90 days. have set price targets for 12 months for C. The consensus rating remains bullish and the 12-month price target is $90.75, 23.7% above the current price.
Analysts' lowest price target is 0.47% below the current price. The high price target, $114, matches the value from my earlier analysis, but the lowest price target, $73, is significantly higher than the previous low of $58.
Wall St. Analyst Consensus Rating and 12 Month Price Target for C
Source: eTrade
The Wall Street Alpha Consensus Search includes ratings and price targets from 25 analysts who have established or updated their positions in the past 90 days. The consensus rating is bullish and the price target is $83.80, 14.4% above the current price.
The essential difference between Seeking Alpha and eTrade's consensus outlook is why I look at both. No analyst in the Seeking Alpha cohort gives C a bearish rating and 18 are either Bullish or Very Bullish.
Wall St. Analyst Consensus Rating and Price Target for C
Source: looking for alpha
Wall Street consensus was also bullish in February, but current price targets imply significantly higher 12-month returns than then. The expected 12 month price increase when I wrote my last analysis (link above) was in the range of 13.5% to 15.94%, compared to 14.4% to $23.7% today. Outlook
I have analyzed call and put options on C at a range of strike prices, all expiring on January 21, 2022, to form the market-implied outlook for the next 5.3 months (from today to that expiration date). I have analyzed the options with this expiration date because this period gives visibility to the end of the year and because I analyzed the same option expiration in my previous analysis.
The standard presentation of the market-implicit outlook is a probability distribution of price returns, with probability on the vertical axis and price returns on the horizontal axis.
Market-implied price return opportunities for C
Timetable Chart: Today to January 21, 2022 (Source: Author's calculations using option quotes from eTrade)
The market implied outlook for C for the next 5.3 months is generally symmetrical between positive and negative returns, although the peak probability tends to lean slightly towards negative returns. The peak probability is at a price return of -1.6% and the median is -0.5%.
The annualized volatility derived from this breakdown is 30%. The annualized volatility of my February analysis was 37%. The decline in volatility corresponds to the decline in market volatility since February.
To make it easier to directly compare the relative probabilities of positive and negative price returns, I rotate the negative return side of the distribution about the vertical axis (see below).
Market-implied price return opportunities for C
Market implied price return probabilities for C for the 5.3 month period from today to January 21, 2022. The negative return side of the distribution is rotated around the vertical axis (Source: Author's calculations using option quotes from eTrade)
The odds of positive and negative returns are almost perfectly matched (the red dotted line is on top of the solid blue line), except for the slightly increased odds of negative returns around the -1.6% peak. There should be two dividend payments between now and January 21, 2022, totaling $1.02. The 1.4% dividend income almost exactly offsets the -1.6% yield that corresponds to the peak probability.
Because investors tend to be risk averse (paying more than fair value for put options), this almost perfectly symmetrical market-implied outlook corresponds to a somewhat optimistic view of the options market.
The market implied outlook for C is noticeably more optimistic than in my last analysis, where the market implied probabilities for negative returns were significantly higher than for positive returns of the same magnitude. At that time, from January 21, 2022, the options had 11 months to expiration and the maximum probability corresponded to a price return of -10%.
Summary
In February, Wall Street's consensus outlook for C was bullish and the market-implied outlook was moderately bearish. Today, the outlook for Wall Street is more bullish and the market-implied outlook has improved to be bullish.
The forward P/E has declined as a result of rising earnings expectations. The expected volatility of C has decreased, further improving the return-to-risk outlook.
Financial stocks face significant uncertainty regarding interest rates, along with other economic and business risks. The increasingly positive outlook from both the analysts and the options market suggests that the expected increase justifies these risks. My general outlook for C is optimistic.
