April 16, 2012
Citigroup kicked off this week's batch of earnings announcements before the opening bell today, and the turnout was as to be expected—lackluster.
Compared with the same quarter last year, first-quarter profits declined 2% to $2.93 billion, or $0.95 per share. On an adjusted basis, earnings per share weighed in at $0.99, which slightly missed analyst estimates of $1.00 per share. Over the same period, total sales also dipped 2% to $19.41 billion, while analysts forecast $19.81 billion in sales.
Citigroup did post solid sales and earnings growth through its global banking segment, which is expected to be a key driver of top- and bottom-line growth. Citigroup's relative strength in international markets was also shown by its gross sales, which slid 9% in North America but advanced 7% in other markets.
All-in-all, I'm not overly surprised that Citigroup didn't quite perform up to snuff. In mid-March, the Federal Reserve conducted a "Stress Test" that determined whether 19 banks would be able to withstand an economic hard landing in the U.S., and Citigroup was one of four that failed. In the case of Citigroup, as well as most financials, I believe that there's still too much ambiguity on these institutions' balance sheets to be worth the risk.
As a general rule, I recommend avoiding financials. I'm a former banking analyst, and I can tell you firsthand that there are still just too many unresolved issues in the industry.
But because I receive so many questions about what the "best" financial stocks is, there are two stocks that I do rank relatively highly if you absolutely have to have exposure to the financial sector—Discover Financial Services (DFS) and U.S. Bancorp. (USB).
Discover Financial Services is one of the largest card issuers in the U.S. and a leading innovator in the credit card industry. The company is best-known for issuing Discover-brand credit cards, which are used by more than 25 million members. The company also licenses Diners Club credit cards, offers banking services, issues student loans and runs the PULSE Network ATM system.
Due to the chaos associated with other financial stocks, especially banks, the stock seems to be benefiting from persistent institutional buying pressure from tracking managers that are forced to own some financial stocks. This stock is currently an A-rated buy in PortfolioGrader due to strong buying pressure and solid fundamentals—the only areas of softness are the company's sales growth and earnings momentum.
The second stock I want to point out is U.S. Bancorp, which I consider to be the safest bank in the United States. Specifically, it is the financial services holding company that oversees U.S. Bank, the fifth largest commercial bank in the country. In terms of financial stability, the closest thing that comes to it is Wells Fargo & Co. (WFC), which is well-run, but U.S. Bancorp. is less burdened by the lingering effects of the mortgage crisis. Now, U.S. Bancorp could stand to improve its sales growth and earnings momentum as well, but is otherwise a solid company.
If you want to do some digging of your own and uncover other highly-rated companies in the Financial sector, please feel free to use my Portfolio Grader sector screening tool—it practically does all of the work for you. We still have plenty more major earnings announcements in the next few weeks, so I'll continue to report on any market-moving headlines.