Ackman Tells Investors Why He's Betting Big On Citigroup (C)
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At the recent Ira Sohn investor conference, hedge fund manager Bill Ackman of Pershing Square Capital disclosed he was long about 150 million shares of Citigroup, Inc. (NYSE: C) common stock. At the conference, Ackman didn't get a chance to explain his reason for the new stake, but a recent investor letter sheds light on his rationale for his big bet which represents approximately 9% of fund capital.
In the letter, Ackman noted that issues related to financial reform, fraud allegation against Goldman Sachs, the overhang from the sale of the government's 7.7 billion Citigroup shares, and Eurozone problems, have all contributed to Citi trading at "a meaningful discount to their fair value."
Ackman also thinks it is an ideal time in history to be a large financial institution. Low-cost funds and deposits, relativity high spreads on new loans, more conservative lending standards, and a less competitive lending environment, creates a opportunity for large profits, he claims.
On valuation, Ackman said there are two important elements that the market does not fully appreciate. The first is a $21 billion operating differed tax assets that will shield earnings form taxes over the next several years. The second is approximately $24-$30 billion of excess capital supporting the wind down of Citi Holdings that will be available to be returned to shareholders as these assets are liquidated.
At the current price near $3.64 per share, investors in Citigroup are paying just three-four times earnings for the core Citigroup, according to Ackman.
Ackman said the impact from financial reform will be less than feared and the conversion of the government's TARP preferred into common equity has given the company a robust capital position.
He closes in saying that while risks remains, he believes the current stock price, capital structure, and hidden assets provide a sufficient margin of safely, in light of the huge potential upside in the stock.
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In the letter, Ackman noted that issues related to financial reform, fraud allegation against Goldman Sachs, the overhang from the sale of the government's 7.7 billion Citigroup shares, and Eurozone problems, have all contributed to Citi trading at "a meaningful discount to their fair value."
Ackman also thinks it is an ideal time in history to be a large financial institution. Low-cost funds and deposits, relativity high spreads on new loans, more conservative lending standards, and a less competitive lending environment, creates a opportunity for large profits, he claims.
On valuation, Ackman said there are two important elements that the market does not fully appreciate. The first is a $21 billion operating differed tax assets that will shield earnings form taxes over the next several years. The second is approximately $24-$30 billion of excess capital supporting the wind down of Citi Holdings that will be available to be returned to shareholders as these assets are liquidated.
At the current price near $3.64 per share, investors in Citigroup are paying just three-four times earnings for the core Citigroup, according to Ackman.
Ackman said the impact from financial reform will be less than feared and the conversion of the government's TARP preferred into common equity has given the company a robust capital position.
He closes in saying that while risks remains, he believes the current stock price, capital structure, and hidden assets provide a sufficient margin of safely, in light of the huge potential upside in the stock.
Market Moving News and Intelligence –Sign-Up Free Today
http://www.streetinsider.com/premium_content.php
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