Long before the sub-prime debacle really got going, shareholders of Citigroup (C) were clamoring for the company to break itself up into several pieces. The argument for such a move stemmed from the fact that enormously large companies get very difficult to manage. By splitting them into smaller free standing operations, they not only can be managed better, but stand a greater chance of growing if they are let loose on their own with separate management teams acting autonomously.
Although I was/am not a Citigroup shareholder, I can certainly understand this concept and think it has a lot of merit. Of course, Citigroup did not break itself up, and now the sub-prime crisis has depressed the share price so much that many pieces of Citi are doing well, but have been ignored as writedowns take center stage.
Doing some kind of break-up analysis can go a long way to figuring out how much each business unit within Citigroup is worth. This would make it easier to figure out if the current share price ($25) is too depressed, or if meaningful downside remains looking out the next year or two.
For the purpose of this exercise, I am going to split Citi into four separate businesses (domestic retail banking, international retail banking, corporate investment banking and alternative investments, and global wealth management) and attempt to value each of them on a standalone basis. That should help us determine if value investors should be intrigued by Citi’s current $25 stock price or not (or at least give us some more data points to use when trying to figure that out — it’s not an easy question).
To avoid a very long post, I’ll split this analysis up over several days (may as well stick with the break-up theme). Feel free to post your thoughts on Citi’s valuation as well. Perhaps we can form a consensus view.
To wet your appetite, below are some important data points on the past profitability of Citi’s four business units. We can use this information, plus our opinion about what the future might look like, to figure out how much Citi could earn in the future, and thus how much the stock might ultimately be worth down the road. (Update: My plan is simply to project both net income and an earnings multiple for each unit and add them up to estimate total company value. Citi’s current market value at $25 per share: $125 billion). I’ll post my opinions in the coming days, and please add your own if you have any strong views one way or another.