Citigroup C) is proving that turnaround stories can create some of the market's best opportunities.
Following an impressive Q2 report last week that topped expectations across the board, analysts have continued raising their earnings estimates, helping Citigroup stock earn a coveted Zacks Rank #1 (Strong Buy).
Better still, despite a remarkable rally, Citigroup stock remains the cheapest among the largest U.S. banks based on forward earnings and offers investors a respectable dividend yield.
Combined with improving profitability and a stock performance that has outperformed both JPMorgan JPM) and the broader indexes over the last three years, Citigroup appears well-positioned to extend its momentum.
Strong Q2 Results Keep EPS Revisions Rising
Citigroup delivered one of the strongest Q2 earnings reports among the major banks.
The company generated its highest quarterly revenue in a decade at $24.76 billion, which was up 14% year over year and comfortably topped estimates of $23.67 billion by more than 4%.
More impressively, Q2 adjusted net income surged 45% to $5.8 billion from $4 billion a year ago. This translated into adjusted EPS of $3.15, crushing Wall Street expectations of $2.72 by nearly 16% and climbing more than 60% from $1.96 per share in the prior year quarter.
Growth was broad-based across the franchise, with investment banking, markets, wealth management, services, and consumer banking all contributing to the strong quarter. Citigroup also generated positive operating leverage as revenue growth significantly outpaced expense growth, highlighting that CEO Jane Fraser's multi-year restructuring efforts continue to improve the firm's operating efficiency.
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Most important for investors, the impressive EPS beat has prompted analysts to raise their profit outlook, leading to favorable earnings estimate revisions. Notably, FY26 and FY27 EPS estimates have risen 2% in the last week and are now up more than 4% in the last 60 days, respectively.
Citigroup is now expected to post 40% EPS growth this year, with FY27 earnings projected to rise another 16% to $12.90 per share.
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The Cheapest P/E Valuation Among the Big Banks
Despite its improving fundamentals, Citigroup still trades at the most attractive valuation among the large U.S. money-center banks at 12.1X forward earnings.
This is slightly below Wells Fargo’s WFC) valuation, while JPMorgan JPM) and Bank of America BAC) command noticeably higher forward earnings multiples.
That suggests investors are still assigning relatively conservative expectations to the company's long-term earnings power, even as profitability continues to improve.
This creates an appealing setup. If Citigroup can continue narrowing its profitability gap with peers while delivering consistent earnings growth, its valuation multiple has room to expand alongside rising earnings estimates.
For value-oriented investors seeking exposure to the financial sector, Citigroup arguably offers one of the most compelling risk-reward profiles among the nation's largest banks.
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Outperforming JPMorgan and the Broader Indexes
Although JPMorgan is widely viewed as the gold standard among U.S. banks, Citigroup has quietly delivered superior stock performance.
With investors regaining confidence in Citigroup’s restructuring efforts and improving profitability, its stock has now surged more than 175% in the last three years. This has impressively outperformed the broader indexes (including the Nasdaq) and JPM’s return of roughly 120%.
That relative strength reinforces the idea that Wall Street is beginning to recognize Citigroup's improving fundamentals. Yet given its discounted valuation, the stock still doesn't appear fully priced for the progress the company has made.
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Citigroup’s Dividend Adds to Total Return Potential
The cherry on top is that Citigroup stock currently offers a 1.82% annual dividend yield that is above the benchmark S&P 500’s average and its Zacks Financial-Investment Bank Industry average, providing investors with a steady stream of income while management continues to execute its turnaround strategy.
Combined with ongoing share repurchases and a strong capital position, Citigroup has demonstrated its commitment to returning excess capital to shareholders.
During the second quarter alone, Citigroup returned approximately $5 billion through dividends and common share repurchases.
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When including dividends, Citigroup’s total return in the last three years is at an exhilarating 200%.
Keeping this in mind, the combination of capital appreciation potential and dependable income makes Citigroup an increasingly attractive financial stock.
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Bottom Line
Citigroup is checking many of the boxes investors like to see.
The company just reported its strongest quarterly revenue in a decade, delivered a sizable earnings beat, and is benefiting from favorable earnings estimate revisions that have earned the stock a Zacks Rank #1 (Strong Buy).
At the same time, investors are paying the lowest forward earnings multiple among the major U.S. banks while collecting a respectable dividend yield.
With improving profitability, an attractive valuation, and momentum that has already surpassed JPMorgan and the broader market over the last three years, Citigroup remains one of the most compelling large-cap financial stocks for investors seeking both value and growth.
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This article originally published on Zacks Investment Research (zacks.com).