Tuesday, March 9, 2010

Citi Up 7% on Treasury’s Exit: Should You Buy? (C)

Back to Barron's Stocks to Watch Today blog:

With just over a week to go before the lock-up expires on the U.S. Treasury’s 7.7 billion in shares of Citigroup (C) common stock, the stock is up 24 cents, or 7%, at $3.80 on volume of 690 million, more than double the average.

Clearly, investors are excited at the prospect the U.S. government will soon be exiting Citi. (Oh, there’s also the prospect that short sales of the stock could be banned, but I wouldn’t put too much stock in that.)

So, should you buy?

First of all, let’s be clear: “The enthusiasm is not about the exit of Treasury but the recognition the company has turned the corner,” says Rochedale Securities analyst Dick Bove. “In a couple of years, they should start to show some significant profits,” Bove told me in a phone call this afternoon, with “normalized” earnings of perhaps 65 cents to 75 cents per share per year.

But he’s not buying at the moment. The expiration of the lock-up is “not the other shoe, it’s an iron boot,” remarks Bove, meaning it’s going to take a couple of tranches for the government to unload its supply of shares without completely obliterating demand.

“If the stock can demonstrate a price around $4 per share, Treasury will get out,” figures Bove.

Indeed, how to exit is a sore matter for the Treasury given that Citi’s common stock offering in mid-December was seen as a debacle, with shares pricing at just $3.15 given the overhang of the government’s involvement.

“The process didn’t work as intended in December,” observes Credit-Suisse’s Moshe Orenbuch. “This has to be done in a thoughtful manner,” with respect to stock sales.

“My expectation is they do this in two, maybe three blocks” of stock sales, says Chris Kotowski with Oppenheimer & Co., referring to Treasury’s sale of the shares. That means that although Treasury has expressed its urgency to get out of Citi, the overhang could hang a little longer.

One rumor making the rounds is that Treasury would actually structure its exit through something called a “reverse-DRIP,” akin to a dividend reinvestment plan, wherein government sells stakes in blocks of 30 million to 50 million shares per day. The process is relatively anonymous, and it would allow Treasury to slam on the breaks should the supply appear to be denting the stock price....MORE