It was during the most recent meltdown that we gave a list of companies where the stocks could still double, and Citigroup Inc. (NYSE: C) was one of them.  Bill Ackman’s Pershing Square disclosed on  June 8. that it held 146.5 million Citi shares, equal to about 9% of Pershing’s capital.  While Ackman gives no formal price target, this continues to show why Citi could be worth far more down the road.

Ackman outlines Citi’s two faces, one of Citicorp and one of Citi Holdings.  The  woes affecting financial stocks is what Ackman believes is “a compelling opportunity to purchase Citi shares at a meaningful discount to their fair value.”

Citicorp is the core of the company going forward with $1.5 trillion of assets including regional consumer banking, securities and banking, and transaction services.  The core business has $21 billion in operating deferred tax assets AND $24 billion to $30 billion of excess capital supporting the wind down of Citi Holdings.  Citi Holdings is effectively liquidating the  portfolio of several operating businesses and legacy asset pools that will be wound down or sold in the coming years.

Ackman noted that at $3.64 Citi trades below tangible book value and trades at five (or so) times management’s earnings guidance.  After scraping out the rest, Ackman believes an investor today is paying on 3X or 4X times real earnings for the core Citicorp.   With a current tier 1 common ratio of 9.1%, Ackman believes that Citi is better insulated from potential late-cycle credit issues along with substantially less home equity and commercial real estate exposure than its domestic peers.

Ackman concludes, “In our view, there is a much greater degree of uncertainty associated with our investment in Citigroup than for Kraft, or for a number of our other holdings. That said, we believe the current stock price, capital structure, and hidden assets provide a sufficient margin of safety, in light of the large potential for reward from this investment.”

As far as our own screening back on May 19, 2010:

• “Citi is the sole pick of large money center or super-regional banks that could possibly double.  There are other regionals that have a shot… it offers the most upside via leverage and spin-offs as it gets down to a”‘core-Citi” operations… Dick Bove of Rochdale at one point in 2010 raised his rating to “Buy” from “Hold” and gave a long-term target of $8.50 on the stock.  With a close of $3.73 on this Tuesday, the 52-week range is $2.55 to $5.43.  A price of $7.50 is under the old Bove target…. The last time Citi was at $5.00 was as recently as April 21, so the price change game here is far from over and we would expect this to be a much longer-term development rather than something fast.”

That full list of stocks that could still double is available here.

The big take here is not the 3X or 4X multiple of earnings.  Our view in the New Normal is that banks and financial stocks will NOT get to keep anything at all close to “at-market earnings multiples” for any time in the near future.  Earnings multiples may settle at 8-times earnings or at 10-times earnings, but what multiple that is depends upon what is still too many parts to assign a set value today.

JON C. OGG

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