Wednesday, December 12, 2007

Citigroup (NYSE:C): Top Short Idea for 2008 - Morgan Stanley

- Morgan Stanley is out pitching Citi (NYSE:C) as their top short idea for 2008. Near-term, the announcement of Vikram Pandit as CEO as well as the Fed should be a plus for Citi. But looking to 2008, we see 3 reasons to be short: earnings are deteriorating, they expect new management to deliver a dividend cut, not a breakup, and they expect further hybrid issuance, diluting current shareholders. The firm does not believe the stock has bottomed out as it is trading above trough multiples: 18% above trough PEs, 24% above trough P/B and 48% above trough P/TB + Reserves.

The firm has lowered their 2008 EPS From $4.01 to $3.55 due to higher losses against loans, CDOs, and SIVs, and due to slower top line growth in the IB and thinner net interest margins given wide LIBOR. They have lowered the forecasted dividend from 54c/quarter to 30c/quarter in 2Q08. MSCO is lowering their price target to $28 based on trough PE levels of 8.0x.

MSCO notes they would be sellers on strength (Fed rate cuts, positive news flow).

Notablecalls: This is a major actionable call! I have been negative on C lately (check recent archives) but when Morgan Stanley pitches it as their Top Short idea for 2008 the stock WILL get hit. Be early and be agressive.

1 comment:

Chris said...

When I hear this sort of extreme pessimism I will throw my hat in with Richard Branson, RAB, Abu Dhabi, Green and co. who are pouring their billions into buying at smart discounts. This will all be over early in the new year and we will be left with incredible value and one of the best banking franchises in the world at about as cheap as you might ever buy them. Price to Book = 1.35 for one of the largest banks in the world - I'll take it thank you very much.