AI Investments And Partnerships With Apollo And American Airlines Will Improve Client Services

Key Takeaways

• Strategic simplification and technology investments are set to boost operational efficiency, potentially improving margins and earnings.
  
• Wealth Management expansion and partnerships may drive revenue growth and positively impact overall earnings.
  
• Economic challenges and investment in transformation may pressure Citigroup's margins, while uncertainties in global strategies and IPO benefits could affect future earnings.

Catalysts

A diversified financial service holding company, provides various financial product and services to consumers, corporations, governments, and institutions worldwide.

• Strategic organizational simplification and management restructuring are expected to enhance operational efficiency and decision-making, likely leading to improved net margins as cost reductions materialize over time.
  
• Investment in technology and AI-driven solutions is anticipated to modernize infrastructure, streamline processes, and improve client experiences, which could boost revenue and operational efficiency, positively impacting net margins and earnings.
  
• The expansion in Wealth Management, with a focus on investments and improved client experiences, is poised to drive revenue growth through increased asset flows and higher fee-based income, potentially enhancing overall earnings.
  
• The $20 billion share buyback program signals a commitment to returning capital to shareholders and could increase EPS by reducing the share count and highlighting the intrinsic value of the company.
  
• Market share gains and new partnership initiatives, such as the private credit partnership with Apollo and the exclusive partnership with American Airlines, are expected to stimulate revenue growth in Banking and Card Services, positively affecting earnings and net income.

Citigroup Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Citigroup's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $18.9 billion (and earnings per share of $10.98) by about January 2028, up from $11.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 2.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

Citigroup Future Earnings Per Share Growth

Risks

• Economic challenges in key regions, such as slower-than-expected growth in China and underperformance in Europe, could impact Citigroup's revenue generation from these areas.
  
• The company is focusing on significant investments in transformation and technology, which could elevate expenses and impact net margins if not managed effectively.
  
• The execution of Citi’s strategic transformation, including data and regulatory reporting improvements, involves risks that could affect earnings if the investments do not yield expected efficiencies.
  
• There are uncertainties related to the market conditions and regulatory approvals for the Banamex IPO, which could delay its benefits on Citigroup’s capital and earnings.
  
• While Citigroup expects lower operating expenses in future years, the pace of achieving these reductions amidst ongoing investments and repositioning costs is uncertain, potentially impacting net margins.

Valuation

• The analysts have a consensus price target of $89.83 for Citigroup based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $113.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $90.1 billion, earnings will come to $18.9 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of $79.94, the analyst's price target of $89.83 is 11.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.