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Prince Al-Waleed of Saudi Arabia lives in a $130-million palace with at least 520 TVs, 400 phones, eight elevators, an indoor tennis court and a bowling alley. Not oil but savvy investments have made him one of the planet’s richest men. He’s worth a cool $20 billion. Like us, the Prince is heavy on techs and loves big cyberwinners like America Online.
Prince’s largest stake
But his largest stake is in Citigroup, which came about through the 1998 merger of Citicorp with the Traveler’s Group. The Prince started investing in Citicorp in the early 1991, bailing out the then-troubled bank with a $590-million loan, and he now owns some $8 billion of shares in Citigroup. Smart guy. With gains from predecessors thrown in, the stock has zoomed up some 2,500 percent in the past decade compared to Nasdaq’s 700 and Chase Manhattan’s 900.
Citigroup shares are up an impressive 20 percent in 12 months, and if the Fed lowers interest rates in 2001 as most expect, this leader could shoot higher along with the other financials. You’ve heard of Gore stocks and Bush stocks; what about timely Greenspan stocks? C might well rise from its present $47 5/16 to $100 in the next few years, given all it has going for it. The 52-week range is 35 5/16 – 59 1/8. No promises of future results, but Al-Waleed is no fool, having regularly walloped the S&P.
Helping send the Saudi’s shares northward these days has been none other than a smart Jewish kid from Brooklyn, Sandy Weill, who engineered the famous merger between Citicorp and his Travelers Group. In his 60s Weill has still been energetic enough to shake up the staid, bankerish culture of Citicorp with a heavy infusion of the entrepreneurial spirit. He has pushed aside co-CEO John Reed, ex-Citicorp head. Reed, albeit a techno-visionary who helped make ATM ubiquitous worldwide, got in Weill’s way. “Let me tell you,” Prince Al-Waleed recently observed, “any company cannot have two leaders. I knew one of them had to go. Reed said, ‘I resigned for the good of Citigroup.’”
Another plus for Citigroup is the impending retirement of the baby boomers. The company claims that “one out of every six affluent individual investors in the United States” is a client of its Salomon Smith Barney brand, with managed assets of Salomon exceeding $650 billion. As we noted in Wealthcast’s October issue, the individual assets of Americans will grow from $10.3 trillion in 1999 to $27 trillion by 2004 and then $43 trillion by 2009 if a Schwab forecast holds up.
On top of everything else, as the world’s largest financial services conglomerate with earnings of almost $10 billion in 1999, second only to General Electric, Citigroup is well diversified for the long term. You can carry a Citibank credit card, buy property or life insurance or an annuity or other products from Travelers Insurance, take out a mortgage from the same conglomerate, or see Salomon Smith Barney mastermind a merger of your employer, you name it. Citigroup is in some 100 countries and yet still has plenty of new customers left to woo, offering an enticing upside.
A Multitalented Global Banking King
We’re talking about a multitalented Banking King at a global level–actually a Financial Services King. Simply put, Citigroup is less susceptible to problems from Sunbeam-style corporate loans that have plagued First Union, other regionals and the Bank of America. The planned purchase of Associates First Capital for $31 billion is expected to strengthen Citigroup both here and abroad.
Furthermore, because of the undeserved taint from the First Unions and the present interest-rate concerns, Citigroup is a bargain for the growth-minded. Even now, the market doesn’t grasp the full value of this 100-million-customer behemoth.
While the market cap is already $230 billion, Citigroup continues to perform. Revenues in the third quarter, for example, went up 15 percent to $16.8 billion from $14.6 billion for the same period last year. Quarterly diluted earnings per share, 67 cents, were 26 percent higher than in 1999. For the first nine months of 2000, diluted earnings per share were $2.10 compared to $1.58 for the same period last year. Core income rose to $9.7 billion, a 32-percent increase over the first three quarters of 1999.
Is Citigroup a hyper-grower like Ariba? No. But it is a good, solid investment for a balanced portfolio. The expected Price/Earnings/Growth ratio for the year ended December 2000 is a mere.62–or a tad less than for the comparable financial services companies and certainly less than the S&P’s PEG of 1.91. P/E is a non-intimidating 18 to one. Covering analysts believe that Citigroup’s earnings will grow almost 28 percent this year compared to a mere 12 percent for the S&P.
|The Negatives |
While Citigroup is a screaming value by S&P standards, it looks diamond-crusted if you compare it to many other financial stocks. The P/E of 18, though below the S&P’s, dwarfs that of Chase Manhattan Bank, a mere 10.
In fact, Chase’s PEG for the period ended December 00 is minus.894, and its expected five-year annualized growth rate is 11.7 percent. The growth rate is not that distant from Citigroup’s 14 percent, compared to the vast gap in the respective P/Es. (Citigroup boosters might say you’re paying extra for Weill’s brilliant managers along with a greater diversity of income sources beyond banking.)
Near term, you should also keep in mind that while a low-interest scenario looks likely for 2001, it isn’t inevitable. Higher-than-expected oil prices or other inflation could keep the Fed from easing.
Another negative has been charges of racial discrimination in the lending practices of Associates and even Citigroup itself. The controversy probably won’t kill the planned merger, but will not help on the regulatory front. The bank has stepped up minority loans in recent years and has many blacks, Hispanics and Asians in its 100,000-plus workforce, but is a long way from placating community groups.
The five-year annualized rate is predicted to be 14 percent, or less than the 19.2 for comparable parts of the financial services industry, but the actual results could dazzle the Street. Cross-marketing of services at branches–steering the bank customers toward insurance, for example–should benefit Citigroup more and more. So will its growing multinational presence on the Internet.
Uncertainties aside–see the box to the right–does Citigroup still sound like your kind of stock? Here are the biggest reasons for our own enthusiasm.
Reason #1: Top-Flight Management
Sandy Weill is both a go-getter and a child of the Depression, an adventurous man but still one with a knack for limiting the downside. While hardly infallible, he has avoided many disastrous loans that befell competitors. A former runner on Wall Street, Weill helped start a brokerage and eventually parlayed his skill and his allies’ assets into control of American Express. He was among the first to grasp the synergies of logical, well-crafted financial mergers.
Ideally Wall Street could follow Sen. John McCain’s suggestion for Alan Greenspan and let Sandy Weill go on forever at his job, propped up like a corpse in A Weekend at Bernie’s. But unfortunately we must look ahead to possible successors. Once Jamie Dimon, a Weill protege, seemed the heir apparent; but Weill disliked Dimon’s treatment of Jessica Weill Bibliowicz, a talented daughter who worked for the conglomerate. Dimon went on to join Bank One as CEO.
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Bob Rubin, alas, the brilliant ex-secretary of the Treasury and now chairman of executive committee of the Citigroup board, is himself is in his 60s and most likely wouldn’t succeed Weill. Still, his Rolodex could be a godsend in the search for the right person. Rubin, moreover, is a deal-maker extraordainaire and a whiz at regulatory and legislative matters.
Among the CEO possibilities is Michael Carpenter. He oversaw Travelers’s life insurance operation and aggressively encouraged the cross-selling of different financial products. These days he runs the investment and corporate businesses. The big negative against Carpenter is that the bond scandal at Kidder Peabody occurred on his watch. Another leading candidate is Citibank veteran Victor Menezes. If Weill does go outside Citigroup after all, one candidate might be Richard Kovacevich of Wells Fargo, who himself once worked at Citicorp. Some say that if need be, Weill would even be willing to acquire a smaller financial conglomerate to pick up the right CEO.
Reason #2: A Mix of Growth and (Relative) Safety
While no stock is completely safe, Citigroup is a solid investment over the long term because of an enticing mix of growth, synergy and diversity of businesses.
Some of the best performances for the first three quarters of 2000 came from North American banking (up 48 percent to $420 million), insurance in Japan (up 51 percent to 104 million) and global relationship banking (up 59 percent to $751 million).
Among the star units was Salomon Smith Barney (up 31 percent to $2.22 billion). Internal and external synergies abound here. Hundreds of deals have been expedited by the relationship between Salomon–one of the planet’s premium mergers-and-acquisitions centers–and Citibank.
Meanwhile Salomon is profiting off the AOL/Time Warner merger, and in the other direction AOL will rake in oodles of advertising dollars from Citigroup’s consumer side. Remember, too, the cross-marketing of different products in Citibank branches. Also, with so much more information available about customers, the parent Citigroup can more precisely target mailings.
Given all the diverse business operations, Citigroup is just like GE or Microsoft–it’s a mutual fund in disguise.
Reason #3: Future Potential in Cyberspace and Abroad
A billion customers globally? That’s how many customers Citi was thinking it just might reach–and this was before the merger. Is such a goal realistic? Perhaps, if Weill and associates can build on bricks that already exist overseas–and augment them with clicks. Speaking of bricks businesses in general, Rubin told an Internet conference: “Existing firms have the benefit of customer relationships, brand identification, scale, capital, management experience, and physical distribution centers.” That’s Citigroup!
Citigroup already has a big presence in places ranging from Japan (where it’s stolen its share of business from rivals in financial services) to Latin America (where it is already a power in the pension area). But at the same time Citigroup has plenty of territories left to conquer through a brick-and-click approach. Net sites for banking, insurance and other services can serve as beachheads in countries without many branches.
What’s more, Citigroup hasn’t just befriended AOL. It’s also a business-to-business player with Oracle. Citigroup will be embedding its payment and settlement capabilities into the Oracle’s B2B market exchange on the Net. At the same time Citigroup will “market OracleExchange.com service” to banking clients and others.
Both within Citigroup and outside, some mutual back-scratching is happening in a very big and lucrative way that may delight the shareholders. Don’t be surprised if Prince Al-Waleed adds on another tennis court or two.