Even though Citigroup (C) passed the Federal Reserve's stress test, uncertainty in a post-Brexit world is forcing analysts to back down on their earnings estimates. Despite the analysts' actions, the bank's stock was on the rise Friday.
Wells Fargo analysts downgraded their recommendation to Market Perform from Outperform. In a research note Friday, the analysts said that global growth uncertainty is poised to weigh on Citigroup shares, adding that the stock has underperformed their overall large-cap U.S. bank coverage universe year to date -- declining 20.2% vs. a peer average 17.2% decline.
The analyst team at Wells also noted that Citigroup generates roughly 40% of its revenue from international markets, meaning a slower global growth rate "is less positive for future revenue growth an investor sentiment in our view."
Jefferies analysts said Citigroup's revenue continues to be pressured by investments in card, international consumer weakness and sub-optimal trading performances. They lowered their earnings estimate by a $0.25 to $4.50 per share for fiscal 2016. While revenue growth seems tough given the backdrop, the analysts said there is a positive note: "Citicorp core expenses should start to decline in [second half] and the better-than-expected [Comprehensive Capital Analysis and Review] buyback outcome is also constructive for share count reduction and tangible book value growth.
Citi announced on June 29, following the Fed's review, a common stock repurchase program of up to $8.6 billion during the four quarters starting in the third quarter of 2016. The bank also increased the quarterly common stock dividend to $0.16 per share.
"Importantly, in a low interest rate environment, where net interest margins (NIM) -- the 'holy grail' metric on which the banks trade -- are depressed, these buybacks are the only way to create much of an impact on share price," said Action Alerts PLUS portfolio manager Jim Cramer and Director of Research Jack Mohr in a note to subscribers June 30.
Citigroup is a holding in Action Alerts PLUS. Since the initial buy date of April 2016, the stock has slipped more than 8%. But after Friday's strong job report, Citi shares jumped approximately 2%, helping to lead the AAP portfolio to a "sea of green" on Friday. The bank is scheduled to report earnings next week.
In other portfolio news, Costco (COST) could be increasing membership prices.
After posting better-than-expected same-store sales, Oppenheimer analysts viewed Costco's recent membership fee hikes outside of the U.S. as a "potential leading indicator of higher fees in the U.S." In a research note Friday, the analysts said the wholesale retail chain has typically raised membership fees in the U.S. every five to six years. They "foresee a rate hike in U.S. membership fees as early as fall 2016, potentially adding $0.15 and $0.12 to our FY17 and FY18 estimates, respectively."
Also, the analysts expect that the somewhat difficult transition to new Citi/Visa credit card is now complete, meaning "sales and membership growth are apt to recover throughout the back half of the year."
The AAP portfolio co-managers echoed similar sentiments in a note Thursday. "Moving forward, we believe disruptions from the credit card transition will diminish, as recognition of the newly enhanced benefits should help lift both traffic and ticket size -- and thereby sales," said Cramer and Mohr.
The stock rallied $10 higher this week following solid sales numbers and AAP took advantage of the gains as they trimmed their Costco position. Even after selling some shares, the Costco position represents more than 3% of the portfolio; the holding has gained nearly 10% since the October 2015.
Also, on the mind of analysts is WhiteWave Foods (WWAV) . Shares of the consumer packaged food and beverage company ticked up despite J.P. Morgan analysts downgrading the stock to Neutral from Overweight. They adjusted their price target upward to $56.25 from $48 based on their belief that the Danone (DANOY) deal will be completed.
While Cramer and Mohr said Thursday that they were ecstatic about the deal but would not be surprised to see counter bids emerge, the JPMorgan analysts are not expecting another bidder to come in over the top. In a research note Thursday, the analysts said the CFO of PepsiCo (PEP) -- another AAP holding -- more or less said that the company was not going to participate, and other potential suitors have indicted no interest or may have antitrust issues.