Jim Cramer Irresponsibly Suggests Citigroup (C) Is Worth Two JP Morgans (JPM)
11:13 am ET 03/08/2010 - StreetInsider
Shares of Citigroup (NYSE: C) are higher today even as the date the U.S. government can start selling it massive 7.7 billion common share stake quickly approaches. At last check the stock was up 2.1 percent to $3.58.
Traders are attributing the positive action in the stock today to two things. 1. Positive technicals and 2. Positive comments from Jim Cramer on CNBC's Mad Money Friday.
On the technicals, the stock is trading above the 50 day SMA and other positive chart trends are developing.
On Friday's edition of Mad Money, Jim Cramer had nothing but nice things to say about CEO Vikram Pandit. Cramer said he did a superb job at the Congressional Oversight Panel and thinks he will keep his job. Cramer called Citigroup the "last great bargain" in the financial sector and thinks the stock can trade to $12 per share in 2012. Cramer is telling viewers to use the government share sale as an opportunity to aggressively buy the stock.
While Citigroup shares may in fact go higher, Cramer's comments on the price target of Citigroup look irresponsible.
A $12 price for Citigroup suggests a market cap of $350.4 billion, based on the current 29.2 billion shares outstanding including units. This would make Citigroup the most valuable company in the world. Not bad for a company that has yet to make a profit.
In comparison to Cramer's suggestion that Citigroup will trade at a $350 billion market cap, Exxon Mobil (NYSE: XOM) is the top company based on market cap at $314 billion, Microsoft (Nasdaq: MSFT) is 2nd at $253 billion, Wal-Mart (NYSE: WMT) is 3rd at $206 billion and Apple (Nasdaq: AAPL) is 4th at $219 billion. The highest bank is JPMorgan Chase (NYSE: JPM) at $170.3 billion.
So in essence, Cramer is telling viewers that Citigroup is worth more than two JP Morgans! Did we say "irresponsible" yet?
Put simply, investors should not rely on comments from Jim Cramer to put a value of Citigroup.
So what should investors look at? Here is our take:
The U.S. can start selling its position in March 16th. Once the government sell their shares, a major overhang on the stock will likely be removed.
Once the share sale happens, investors can start to look at traditional valuation methods. Banks normally trade at 10x EPS. So you can go out to 2011 EPS estimates of $0.34 and place a value of $3.40 on Citigroup. Because Citigroup may have better earnings leverage than competitors as it ramps up profitability, a 15x multiple may be more appropriate. At 15x EPS of $0.34 you can get to a price of $5.10. Let's get a little more aggressive and go to 10x the street high 2011 EPS estimate of $0.55 and you get a price of $5.50. Go to 15x this 'street high' and you can go to $8.25.
So here you go, Citigroup should trade between $3.40 and $8.25. The low end of this range is much more likely until the shares sale is done and a clear profitability picture develops.
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