Citigroup stock has the potential to earn almost 14 points of upside if the board of directors just does two important things, Cramer says: It has to dump CEO Chuck Prince and break up the company.
“It’s time to break things up and bring out some value,” Cramer says, but that can’t be done with Prince, one of the architects of Citigroup’s failing “one-stop shop for all things financial” strategy, still at the wheel.
A deposed Prince could add five points alone, and Cramer figures a broken-up Citigroup could garner almost another nine. That’s still a $63 stock even if the Clown Prince sticks around.
There’s a method to Cramer’s madness here. He didn’t just pick a number out of thin air. He broke Citigroup into a few parts – U.S. consumer business, international consumer business, global markets business, investment banking, and transaction services – attached a multiple to each segment’s earnings, and then added the whole thing together.
He got the multiple by averaging a basket of comps. Even then, the market isn’t always right, so in certain segments, such as the international consumer business and global markets division, he adjusted the number to suit. Citigroup has a great overseas business, so Cramer gave it a 40% premium. The comps for global markets were too low, so Cramer bumped up the number another 20%.
The final tally, the sum of the segments with their multiples, is Citigroup’s break-up value: $63. Where’s Citi today? About $54.
Despite the logic in Cramer’s assessment – an assessment shared by others on Wall Street – there’s no guarantee that the board of directors will take any action at all. So if you choose to buy Citigroup, you’re taking a calculated risk the company will make what looks like a smart business decision. Understand that before buying in.
Jim’s charitable trust owns Citigroup.