Associates deal may buoy Citigroup earnings a nickel more than the forecast 10 cents a share
Citigroup Chairman Sandy Weill positively gushed last week about his purchase of Associates First Capital for $30 billion, or $41.25 a share. And who could blame him? Associates is the country's largest finance company, and it boasts an especially strong international operation, including a lucrative consumer finance business in Japan, where Associates is the fifth-largest consumer lender. But Associates wasn't held in such high esteem in February, when Barron's profiled the company.
Back then, Associates shares fetched around 19, down from a 1999 peak of 49. Investors were worried that the firm couldn't continue its enviable 25-year streak of annual profit growth in excess of 10%. To us, Associates looked cheap, trading as it was at less than nine times this year's projected profits of $2.32 a share. We suggested the company could become a takeover target for one of several giants, including Citigroup. Tom Goggins, a portfolio manager with John Hancock Funds, told us Associates could double in a year, which it has done, closing last week at $39.75, up $11.75. Citi slid 50 cents to $56.50.
Weill, long a fan of finance companies, got a chance to pounce because Citigroup's price-to-earnings ratio is a good deal higher than that of Associates. Citigroup is paying roughly 17 times projected 2000 profits for Associates, while Citigroup's own shares fetch 20 times estimated 2000 earnings. Citigroup sees the merger adding at least 10 cents a share to its profits in 2001.
Associates is Weill's kind of company for two reasons. It has had consistent profit growth over the past 25 years, and the company's decentralized structure offers ample opportunity for cost savings. Citigroup is hoping for $600 million in annual savings at Associates, but some investors think that the achievable number could be closer to $1 billion. If so, that would boost Citi's earnings by 15 or even 20 cents a share, not just 10 cents.
The competitive Weill also is betting that Associates' stable income stream will help raise Citigroup's P/E ratio even higher. Already Citi's P/E stands above those of major banks such as Chase Manhattan, but it trails the companies that Weill regards as Citigroup's true peers, including American International Group and American Express. Their shares trade at 35-30 times their projected 2000 profits. You could read that between the lines when Weill complained to analysts after the Associates deal was announced that Citigroup's growth has been higher "than financial companies that sell at 50% higher multiples than ours." So that no one would misunderstand which companies he was talking about, Weill said they were "in the early part of the alphabet."
The Associates deal, due to close by yearend, will make Citigroup the most profitable company in the world, topping General Electric. Citigroup's pro-forma earnings for 2000, including Associates, are expected to be around $14 billion. That's $1 billion more than GE's. Don't think that Weill doesn't care about such matters. It probably galls him that Citigroup has more profits than GE but only half GE's $600 billion market value. His goal seems pretty clear.
Some investors suspect that Associates' top brass are happy to lose their independence and say goodbye to skeptical Wall Street analysts and the fickle stock market. Associates had successfully operated as part of other companies for 28 years until Ford Motor took it public in 1996. Now it's part of the Citigroup juggernaut.
- Andrew Bary
interactive.wsj.com
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Wants to beat GE. Tough to see.
Jack |
