Citi Stock Deep Dive: Earnings, Buffet factor support BUY rating, $60 price target

Описание: Welcome back to our deep dive series where this time we focus on the financial sector and look at Citigroup (C). This is the first deep dive we have done on a bank or financial institution and regular readers will notice a different valuation method at play here. Valuing banks is different from more traditional businesses.

For most businesses, we analyze future cash flows and discount them to the current value to come up with our fair share price. Banks are inherently different. This is due to the nature of capital and debt and how those are used. For a traditional company, debt and equity are capital and so can be used to fund or expand the business. But for banks, capital and debt are part and parcel of the business operations.

When you deposit money in a bank that is treated as a debt to you or liability in the bank's financial accounts. However, that debt can also be used to make money. The bank lends multiples of your deposit as mortgages, loans, etc. The difference in interest rates paid on your deposit versus what the bank receives from loans is called Net Interest Income (NII) or Net Interest Margin (NIM) probably the most important metric for commercial banks. However, treating deposits as a liability messes up the standard DCF calculation method so we cannot really use DCF to value a bank or financial company. So we adjust the DCF accordingly meaning we just take net income forecasts and discounts to get a current value.

One alternative is to use a dividend discount model but some banks do not pay dividends so this can be less than clear. So valuing a bank is even harder but below we still go through the main methods to come up with our fair price.

We then add in macroeconomic considerations to determine if this adds to reduces our fair value price and finally complete the picture with a look at the technical set up which then leads to our final 12-month price target. We differ slightly from Wall Street in that we adjust our initial fair value price target based on the market cycle, macroeconomic cycle, and technical forecast. This gives a more accurate estimation in our view. We also go through differing scenarios in each valuation model to arrive at the "best fit" based on recent earnings and forecasts.

Read Ivan's full Citi (C Stock) deep dive article here: https://fxstreet.page.link/HrtS2GtP4j...