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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (37120)	3/28/2010 6:51:04 PM
From: E_K_S	1 Recommendation Read Replies (3) of 78740

Hi Paul - RE: Citigroup, Inc. (C) It is hard for me to value the company because we just do not know what percentage of their loans are still bad, will these loans get better over time, what average free flow cash is generated from their on gong business (ie fee, interest charged etc.) after they have sold off their money generating divisions and what will the reverse split be. According to YAHOO the BV of C is $5.35/share (w/ 24.48 Billion shares out!). I believe this assume that all loans on the books are valued at 100 cents on the dollar. At Friday's closing price of $4.31 represents 80% of BV or inversely a 20% discount to fair value of assets. If the company is leverage 10:1 on their capital then I can infer from the current market price of $4.31 that their basket of all their loans are only valued with a 2% discount. I believe their loan portfolio s/b valued at least with a 10% discount and maybe one could even argue a 20% discount is a better conservative estimate. If you use a 20% discount then the BV s/b less than zero (ie. no value). If you use a 10% discount, then C should be valued at $0.35/share. If you add back in the free flow cash generated per share from fees and other ongoing operations (after the sale of the cash cow divisions) may be as high as $15Billion. That's equivalent to $0.61/share. At 6x free cash flow that equals $3.66/share. Add back in $0.35/share from bad loans that might actually turn out good. I come up with a number of $4.01/share. This back of the envelope analysis just shows the magnitude of the numbers that C management can jigger. First 24.8 billion shares is HUGE (24x that of IBM). This number impacts cash flow per share etc.. 2nd the loan leverage ratio of 10:1 vs 15:1 vs 5:1 impacts the bank's profitability (especially when you start to actually write down the bad loans). For example every dollar loss at a 10:1 capital leverage ratio is a $10 loss to BV (and to their capital reserves). I am just happy I held my nose and sold all of my C shares at $19.00/share in September 2008. I was not so lucky with my WM shares but got $55.00/shares for 50% of my shares on my last sale but still hold the other 50% now valued at $0.16/share. My cost was around $20.00/share so I broke even. The moral of this story is that the individual investor has no way to verify the quality of the loans the bank holds in their portfolio. I own NYB where they have entered into arrangements with the FDIC where the FDIC guarantees the payoff of all the loans assumed by NYB from failing banks (now about $12 Billion). NYB's management has proven that their lending criteria is sound with less than 1% of their loans that go sour (measured for a 10 year period). It's also a much smaller bank (easier to manage) and not a mega bank like Citi (many potential land mines that can explode throughout their world wide operations). EKS P.S. I guess a strategy for C is to repackage their retail mortgages and sell them to FHA or Fannie Mae but I suspect very few of their bad loans can be hidden in the bundles like in earlier years. The true picture for C is the dust will take at least another 24-36 months to settle and once 70% of their bad loans are written off and a better picture of their free flow cash flow is presented will we know what a reasonable value for the company should be. For now, I am not touching this one or any of the mega banks. I will stay with NYB and have them pick up the sour loans for $0.60 on the dollar w/ the FDIC providing guarantees.

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