Citi’s Turn to Shine
April 17, 2009
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RELATED TICKERS: C
Following the Wells Fargo earnings beat pre-announcement and strong reports from JP Morgan and Goldman Sachs, investors were interested to find out if Citigroup (C) could make good on CEO Vikram Pandit’s promise of strong results last month.
The results? A smaller loss than expected, except maybe it wasn’t really a loss, kind of.
Analysts were expecting Citi to report a loss of 32 cents a share. The reported number was a loss of 18 cents a share. Now you’re probably asking how a loss might not really be a loss. The answer. Preferred stock dividends and a conversion adjustment.
Citi reported operating earnings of $1.6 billion for the quarter. If my math is correct, that would have been about 30 cents a share. Subtract preferred share dividend payments of $1.3 billion and a preferred share conversion adjustment of nearly $1.3 billion and those operating earnings turn into a loss of 18 cents per share.
Like most financials, the report included both good and bad news.
Positives include:
Actually earning money on an operating basis
Expenses down considerably
A reduction in riskier assets
A build in loan loss reserves.
Negatives include:
Credit losses continuing to rise
Flat deposits when most of their competitors are increasing deposits
Pending share dilution from an upcoming preferred conversion
Government TARP unknowns.
The upcoming preferred conversion is something anyone with a position in C or who is considering a position needs to understand. Not sure I understand it, but that’s never stopped me before.
Citi has offered to convert a bunch of preferred shares to common stock, including some of the TARP preferred. Assuming I skimmed the registration statement correctly, there is a potential for nearly 16 billion new shares if all eligible preferred is converted. The current float is only about 5 and a half billion shares.
The preferred conversion comes with a lot of dilution, but it will substantially reduce the preferred dividend payout. Maybe Citi reports a real profit next quarter. Or not.
Summary:
The Fed is loaning money at near zero, Wells Fargo pre-announces a record quarter, JPM and Goldman Sachs report strong results. Citi follows that up with earnings that aren’t really earnings???. If they can’t report a profit for a quarter with near zero Fed money, what will it take?
For what it’s worth, I red-thumbed C in CAPS this morning, but have no interest in putting real money on it either long or short.
Disclosure – Long WFC, no position in any other stock mentioned.
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