Tags: Alwaleed | Bin | Talal

Alwaleed's Big Citi Bet

By    |   Thursday, 04 December 2008 09:47 AM

Saudi Prince Alwaleed bin Talal was once praised by Time magazine as the Middle East's answer to the Oracle of Omaha after a 1991 investment in then-troubled Citigroup propelled him to the ranks of the world's five richest people.

At that time, Alwaleed paid a split-adjusted $2.98 a share for Citicorp. According to Bloomberg, in the decade through 2007, the stock averaged $42, but it has been trading below $5 in recent weeks.

From 1980 through 2006, Alwaleed's investment fund reported average annualized gains of 19.9 percent. This almost doubled the S&P 500 return of 10.4 percent a year, however he significantly lagged Buffett, who delivered profits averaging 25.7 percent a year over that same time.

The prince has fallen on hard times this year. Alwaleed's Kingdom Holding Co. has declined by 63 percent, destroying $13 billion in shareholder value. He owns more than 90 percent of the publicly traded company.

Undeterred by losses, Alwaleed announced recently that he will increase his stake in Citigroup, his largest holding. He now owns almost 5 percent of the troubled financial firm.

According to a news release issued by his investment company, Alwaleed is buying Citigroup shares because the prince believes they are "dramatically undervalued."

"Prince Alwaleed is fully confident that Citigroup's universal banking model and global franchise will make it a long-term winner in the financial services industry," Kingdom said.

Applying an approach similar to Buffett, Alwaleed built his fortune and enriched his shareholders by investing in brand name companies he considered undervalued, including Apple, Amazon.com, and Time Warner.

Forbes magazine estimated his net worth at $21 billion in March, ranking him 19th among the world's billionaires. His wealth is now under $10 billion.

The company's Web site states that its vision is simple: to "invest in the best" through a strategy of:

  • Focusing on core growth and value-added industry sectors

  • Investing in high performance companies with leading brands

  • Maintaining a longer-term investment approach

  • Extracting value from undervalued or underperforming assets

    For this week's screen, I sought to quantify the prince's criteria:

  • The prince's major investments are in real estate, hotels, banking, and financial services. The screen is limited to financials and conglomerates to identify companies in the sectors where he is most likely shopping.

  • Leading brands tend to be owned and marketed by the largest companies. Only the top 5 percent of companies in terms of market capitalization are considered.

  • In order to invest for the long-term, the company must be able to survive. In today's uncertain environment, there can be no guarantee of that. To increase the odds in our favor, companies whose liabilities exceed assets were eliminated.

  • Underperforming assets were defined as companies lagging the overall stock market.

    Only five companies, including four financials, make the list:

    Barclays (BCS) reported profits before taxes for the first nine months of this year were slightly ahead of 2007. Revenue growth was strong, and costs, according to the company, grew broadly in line with the rate of income growth. BCS demonstrated its financial strength and confidence in the future by spending $1.75 billion to acquire the North American operations of bankrupt Lehman Brothers. Recently trading at 9.30, BCS is paying a yield of 15.9 percent, which is likely to be cut.

    Citigroup Inc. (C) represents an investment in Alwaleed's savvy. The prince is very knowledgeable about the company and his recent investment signals his faith in its future. With access to senior management, he is likely to have seen the business plan and approves of it. At a recent price of 7.25, C has almost doubled since his investment.

    ING Groep (ING) is a Netherlands-based financial services company which received a $13 billion bailout from the Dutch government. While earnings estimates are very likely to be subject to downward revisions, analysts expect the company to earn more than $2 a share in 2009, which means ING is trading at a P/E ratio of 3 at the recent price of 7.32.

    Prudential Financial (PRU) was recently upgraded by Citigroup analysts. The stock of the insurer is expected to reach $30 a share, sharply lower than the $80 target the analysts had set earlier this year. This would represent a gain of more than 50 percent from recent price levels near 19. Earnings estimates for the full years 2008, 2009, and 2010 were lowered to $5.95, $7.00, and $7.90 respectively, "to reflect the impact of the sharp decline of equity markets on fee-based revenues tied to lower assets under management," indicating that analysts are considering the credit crisis in their price target.

    Rio Tinto (RTP) is a U.K.-based mining company with operations around the world. RTP is also poised to profit from the Obama economy as a basic materials company that will profit from infrastructure development. The company recently spurned a takeover offer from BHP Billiton which valued RTP at about $200 per share. Declining commodity prices and the demise of that deal have driven RTP shares to about 85 a share. At this level, the stock trades with a P/E ratio of only 4 based upon the most pessimistic of next year's projected earnings of more than $22 a share. The dividend is $5.44 a share, amply covered by earnings and paying patient investors a yield of more than 6.4 percent.

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    Saudi Prince Alwaleed bin Talal was once praised by Time magazine as the Middle East's answer to the Oracle of Omaha after a 1991 investment in then-troubled Citigroup propelled him to the ranks of the world's five richest people. At that time, Alwaleed paid a...
    Thursday, 04 December 2008 09:47 AM
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