Citigroup stock: Cheap chic

Stock Spotlight: The banking giant was one of the worst performers of the Dow last year. But with more trouble lurking, is it worth buying the stock?

NEW YORK (CNNMoney.com) -- Of all the investment tales that have unfolded as the mortgage crisis swept through Wall Street, none has been more engrossing than that of Citigroup.

The financial services giant has shaken up its top management, sold a $7.5 billion stake in the company to a Middle Eastern state investment fund and watched its stock tank - all within the last two months.

Citigroup (C, Fortune 500)'s stock endured one of its worst annual performances on record last year and was the worst performing Dow component in 2007. Its shares finished the year down 47 percent.

But with the stock now trading just below $30 a share, some analysts have argued that the traditionally blue-chip Citi looks pretty attractive right now for long-term investors - given the company's earnings potential and its global presence at a time when overseas economies are enjoying robust growth.

"To me it does look a bit cheap given its international exposure and the growth there," said Adam Compton, head of U.S. financials research at RCM Capital Management in San Francisco.

So is Citigroup stock worth the gamble?

Maybe not. The company is widely expected to post a loss for the fourth quarter on Jan. 15, as well as take another staggering writedown. And there are concerns that newly appointed CEO Vikram Pandit, with his limited experience, won't be able to revive the ailing firm.

Leading the Citi charge

It's unlikely that many Citigroup shareholders shed any tears when former Chairman and CEO Charles Prince stepped down in November amid the company's multi-billion dollar losses on bad mortgage bets.

But the appointment of Pandit to the position of CEO and Sir Win Bischoff as company chairman hasn't exactly soothed Wall Street either, with critics pointing at the new management's lack of experience at running a firm as large and diverse as Citigroup.

"Other than the new CFO, it is unclear as to why any of these people have their positions since none have demonstrated the skill set necessary to function in these positions," Punk, Ziegel & Co. analyst Richard Bove, who rates the stock a "buy," wrote in a research note published earlier this week.

So far, however, Pandit, a former Morgan Stanley (MS, Fortune 500) executive, has shown some courage. Last month, he moved $49 billion in assets from Citigroup's seven troubled structured investment vehicles, or SIVs, onto the company's balance sheet in order to protect their credit ratings and give them time to sell their assets.

Some analysts believe that given his position as a newly installed CEO, Pandit has some leeway to make other, much-needed changes at Citigroup, such as selling some of the company's non-critical assets and slashing the company's bloated payroll on top of the 17,000 job cuts announced last April.

"You would want to make those changes at a time when you were not judged as harshly," said Kris Niswander, banking analyst and associate director at research firm SNL Financial.

Credits and losses

What appears unavoidable for Pandit and the company, however, is a fourth-quarter loss - and most likely another humiliating writedown related to Citigroup's exposure to mortgage-linked securities.

In early November, the company warned it would write down as much as $11 billion when it reports results Jan. 15 because of its exposure to the subprime mortgage market.

But some analysts have warned that number could grow because of tough credit market conditions during the period. Last week, Goldman Sachs analyst William Tanona estimated that Citi could take a $18.7 billion hit in the fourth quarter.

Such a loss could prompt some interest in Citigroup among investors who have been waiting for the firm to finally hit rock bottom. But what also ails Citi is the company's capital constraints, or a lack of available funds to absorb losses.

Abu Dhabi's state investment fund bought a stake of Citi in November in exchange for a $7.5 billion cash infusion. Analysts such as Tanona and CIBC World Markets' Meredith Whitney have argued recently that Citi still needs to take additional action to raise capital, including cutting the company's attractive dividend.

"That would be a concern as an investor, but there is a good possibility they might need to cut it," said Rose Grant, a managing director at Eastern Investment Advisors who is bearish on Citigroup stock even though her firm owns shares of the company.

Forget the bad, buy the stock

It's undeniable that the road ahead for Citigroup is fraught with plenty of obstacles, with few indications that the company will recover any time soon.

But buried underneath all this negative news is an awfully attractive stock that has not traded at these levels in about 5 years.

The consensus on Wall Street is that given its recent swoon, Citigroup shares have become much more attractive lately. According to Thomson First Call, 15 of the 19 analysts following the company have either a "buy" or "hold" rating on the stock.

The consensus 12-month price target is $38.13, about 34 percent higher than its current price of just under $29 a share.

Based on a price-to-book-value ratio - a measure of assets minus liabilities that analysts prefer for comparing financial stocks because of the earnings volatility in the sector - Citigroup is a pretty attractive value compared to its peers.

Citi trades at about 1.1 times book value. That's cheaper than rival JPMorgan Chase (JPM, Fortune 500), which trades at a multiple of 1.2, and Bank of America (BAC, Fortune 500), which trades at a multiple of 1.3. Even embattled Merrill Lynch (MER, Fortune 500) trades at a multiple of 1.3.

Granted Citigroup stock may not be quite the bargain for those investors looking to enjoy a tidy dividend, and there could be some short-term pressure on the stock given the uncertainty surround the fate of the company in the months ahead.

But with a CEO in place who is showing early signs that he is bold enough to save the firm, and impressive earnings potential across the company's domestic and international divisions, long-term investors can be sure that opportunities to snap up Citi stock at these prices are not likely to be around for too much longer.

"Citigroup has a tremendous amount of brand strength and earnings power," said Niswander. "It is a strong company."