What is Citigroup (C) Worth?

Ever since the government bailed out Citigroup (NYSE: C), there have been two market pundits telling everyone in earshot to buy the stock. These two are Rochdale banking analyst Dick Bove and CNBC Talking head/TheStreet.com Founder/Former Hedge Fund manger Jim Cramer. Now Bove has gone into hibernation and claims he is now moved to Sell on the stock, while Cramer is getting more bullish. Who is right?

To get to that answer one really needs to look at the earnings power of the company. As a tradition, banks trade at 10x EPS. But since Citigroup, and other banks, screwed things up so bad, they currently have only losses. So instead of current earnings, analysts are now looking at 'normalized earnings' for the company, or the amount it would make if things normalize - which appears to be the growing trend.

EPS of course is corporate earnings divided by the number of shares outstanding. This is where Citigroup has a issue, since there are soooo many shares out. In fact, no U.S. company has more shares outstanding. After a recent equity raise, Citigroup has 28,277,130,193 shares outstanding. That's enough to give every person in the U.S. 92 Citigroup shares! Also in tandem with the recent common stock sale, the company also sold 35 million Tangible Dividend Enhanced Common Stock. These units have an automatic conversion and the holders will receive between 25.3968 and 31.7460 shares for each unit they hold no later than December 15, 2012. This adds another 889 million - 1.1 billion shares once they are converted.

So for our assumptions we will say there are 29.2 billion shares of Citigroup outstanding all-in, which is the best case scenario for the conversion.

Today, with the stock trading at $3.37/share, the implied market cap of the company is $98.4 billion. To put this into prospective, Google's (Nasdaq: GOOG) market cap it $190 billion. Apple's (Nasdaq: AAPL) is $180 billion. In bank land, JPMorgan Chase (NYSE: JPM) has a market cap of $165 billion.

Some EPS assumptions and price targets:

• Assumptions #1. Earnings of $20.4 Billion. Share price $7.00
  In the go-go days of 2006, Citi had its best yearly earnings from continuing operations of $20.4 billion. If the company ever made $20.4 billion again then this would equal EPS of $0.70 per share. Take a 10x multiple on this and you get a stock worth $7.00 per share.
  
  
• Assumption #2: Earnings of $10.2 billion. Share price $3.50
  Since Citigroup is half the company it was in 2006, lets give the company half of the earnings from that year or $10.2 billion in earnings. If the company ever made $10.2 billion then this would equal EPS of $0.35 per share. Take a 10x multiple of this and you get a stock worth $3.50 per share.
  
  
• Assumption #3: Earnings of $2.4 billion. Share price $0.80.
  Earnings from continuing operations last quarter were $593 million. The quarter had a lot of moving parts, but maybe less than some others. Let assume the company is able to continue this trend and drops down this number to the bottom line. Lets extrapolate this out to the year, which would give the company $2.4 billion in earnings. If the company ever made $2.4 billion then this would equal EPS of $0.08 per share. Take a 10x multiple of this and you get a stock worth $0.80 per share.

So if you look at the above assumptions, bears would argue with Bove that the stock is overvalued. Bulls would argue with Cramer that the stock is fairly valued or undervalued.

What do you think Citigroup's earnings power is? Be realistic. Remember there are 29.2 billion shares outstanding. So if you say "I think Citigroup can earn $1 per share" that would mean the company has earnings power of $29.2 billion. This would make it the most profitable company in the world. This would seem unlikely, but if you have a strong case then make it.

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