Buffett's IPO Investment and Citigroup's Next CEO


By Matthew Frankel, MotleyFool

In this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the recent news that Citigroup (NYSE:C) CEO Michael Corbat will be stepping down in 2021, and current President Jane Fraser will be taking his place, which will be the first time a woman has been CEO of a mega-bank. Plus, we recently learned that Warren Buffett's Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) will be taking a stake in Snowflake's upcoming IPO. And finally, the pair tells listeners why Walker & Dunlop (NYSE:WD) and Adobe (NASDAQ:ADBE) are on their radar this week.

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This video was recorded on September 14, 2020.

Jason Moser: It's Monday, September 14th. I'm your host Jason Moser. On this week's financial show, Citigroup has got a new CEO, Buffett is buying into an IPO, and we've got a couple of stocks for you to keep an eye on. And joining me this week, as always, is Certified Financial Planner Mr. Matt Frankel. Matt, it's looking like you've caught up a little bit on the rest that apparently you lost when you made the big old excursion down to Disney World last week, huh?

Matt Frankel: Yeah, we decided to take the kids. It was a lot of fun. It's really cool to experience Disney without the giant crowds that, you know, if you normally go during the Summer, it's like shoulder-to-shoulder in there. So, it was nice to not have to deal with that. [laughs]

Moser: [laughs] That's great. How long were you guys down there?

Frankel: We spent three days at the park, so it was really nice. We got to do all the rides that we couldn't do when we were in February, because you know a five-year-old doesn't want to wait in line for three hours, so. [laughs]

Moser: Yeah, I guess that's right. Now, your kids are still young enough to where, I mean, they can't go on the big rollercoasters yet, right?

Frankel: No, my daughter can go on most. There were a few she couldn't get on. I mean, the little, I have a two-year-old, and obviously he couldn't do much of anything, but yeah, my daughter's favorite ride there was Big Thunder Mountain Railroad, the rollercoaster.

Moser: Oh, nice. Yeah, I always felt that was fun, like, when my kids got to that age and they could actually jump on those coasters, that was like, that's when you knew that it was getting serious. I mean, when you're a kid and you're hitting those rides, you know, that's when you're experiencing the real world, the real Disney World. And it made me think of, a little while back we took our kids to Universal and we did a lot of the rollercoasters there at Universal, which they have some pretty monster rides there, between like The Hulk and the rock 'n roll and everything, and that was a lot of fun. I enjoyed that period a little bit better than, you know, Small World and stuff like that.

Frankel: [laughs] Yeah, I'm pretty sure. No, my daughter preferred the rollercoasters to all the kids rides.

Moser: That's awesome. Well, we're glad you got back safely.

Frankel: Thank you.

Moser: Let's jump into what we want to talk about this week. And first up here, you know, this was a refreshing headline to see, this was some good news to see, in that, Citigroup is going to be getting a new CEO here soon. Now, Michael Corbat, who's the current CEO of the company and has been with the company for a number of years, I think +30, decades, he is set to retire next February 2021, and set to succeed Mr. Corbat will be the first woman CEO of a megabank here, I think, ever, if I'm not mistaken, Jane Fraser. She's been with the company, I believe, for 16 years now. Jane Fraser will be taking over as CEO of Citigroup in February.

Matt, this was big news for a lot of reasons. I think Mr. Corbat, he feels that he's had his time and it's time to move on and do other things. But to see Citigroup take this step, I mean, it is certainly the right time, it feels like, to be doing this.

Frankel: Well, absolutely. For one, Citigroup is one of the more progressive banks. I don't know if you're aware of this, but out of the six largest banks in the U.S. Citigroup's board has the most gender diversity on it. So, from that angle it wasn't totally a surprise. The reason this was surprising was, because of how early it happened. Jane Fraser was promoted to President not long ago. And at that point it was pretty obvious that she was going to be the successor. But Michael Corbat is only 60, which is younger than most other big bank CEOs. I mean, Jamie Dimon is older than Michael Corbat. So, it was just kind of how early it happened.

But like you said, the overall climate right now probably had a lot to do with it. It does seem like a very right time in history for this to happen and they couldn't have picked a better candidate. I mean, she's currently CEO of the Global Consumer Banking, she was former CEO of, I think, their Latin American division and a few other divisions at certain points in time. So, it seems like the right move and the right timing. And she could be CEO for quite some time, she's only 53. So, she could be CEO for -- I mean, like I said, Corbat retired kind of early for a bank CEO, she could be at the helm for a decade or more if it's going well.

Moser: Yeah, and it feels like. I mean, Citigroup, I believe this is the third largest bank in the world or at least the country by assets. You know, I remember during the financial crisis, I mean, Citigroup is clearly one of the banks that had a tougher time than most. Many of you may recall they actually went through a reverse split at one point, which at the time was just something [laughs] they really kind of needed to do. But to see that they were able to come out on the other side of that in one piece and really able to continue building the business was encouraging.

Now that said, if you look at the year-to-date if you look at the last five years for the stock. I mean, it's not been a good year, and frankly, in the last five years, you look like you're essentially flat, if you're an owner of these shares. And so, it does, it feels like, at least, that Ms. Fraser has a pretty good situation coming in here, in that, the expectations -- you know, Mr. Corbat, for all that he's been able to do their since he's held the position since 2012, I mean, the returns are the returns, and that's ultimately what shareholders are looking at for the most part. And it feels like at least Ms. Fraser is in a pretty good position here to take this company onward and upward.

Frankel: Yeah. And I mean, it's worth pointing out that Corbat has been at the bank for 37 years, but he's only been CEO for eight of those. So, he wasn't in-charge during the financial crisis when that reverse split, you were talking about, happened. So, it wouldn't be fair to blame that part of the history on him.

Moser: Oh, yeah, no.

Frankel: Since then, Citigroup has underperformed the other big banks. And there's a bunch of factors that go into the returns of Citigroup, the big reason they've underperformed recently is that they're a lot more international than the other big U.S. banks. They have a lot more exposure to the European market, for example, than a lot of the big U.S. banks do. So, that's held down returns a little bit. I can't really make the argument that Corbat has done a bad job in his time as CEO, maybe his predecessor I can make that argument for. You know, there's a reason that Citigroup, really, had to do a reverse split and didn't perform very well during the financial crisis era. But in the eight years that current leadership has been in effect, you know, they've underperformed the banking sector, sure. I'm pretty sure they've outperformed Wells Fargo, but don't quote me not. [laughs] I don't want to -- I'm pretty sure.

Moser: I think you're right, but you know, I'm looking at the chart here now, as we speak. And I mean, it definitely is a close one until you get toward like the most recent several months, year or whatever, where Citigroup has been able to, sort of, overtake Wells, but yet it's not been -- neither has been lighting the world on fire at this point.

Frankel: No, for sure. And like I said, time will tell what will happen next. Like I said, a lot of the downside has been because of the bank's international exposure more than its actual lending practices or anything troubling like that. But you know, they didn't have any giant scandals like Wells Fargo did. They've just -- you know, their returns have underperformed, no shadiness going on there; as far as we can tell. [laughs]

Citigroup, I know doesn't have the best reviews for things, like, technology. Bank of America generally leads on technology, when it comes to the big four banks. They don't have the best reviews when it comes to customer service. But I wish her well and I think that her leadership might be just what the bank needs right now.

Moser: Yeah, it may be. And I'm glad you brought up the technology and then the service side of things, because I mean, when we talk about these mega banks and all of the advantages that their scale brings them, I mean, in a lot of cases, it really does still just get back down to basics, right? I mean, banking is not rocket science, I mean, the main idea is to build a customer base that trusts you and do right by them. And you know, all banks are in the same boat right now dealing with the current interest rate environment that we have. But you mentioned technology, you mentioned customer service there.

What do you feel like, do you have any inclination as to what one of her priorities might be stepping into this role early next year? I mean, we will, in all likelihood, will at least be looking toward the, you know, the back-half of this pandemic stuff. Hopefully, we'll be coming out of the harder times that that has presented. What do you feel like some of the priorities for her might be for this bank starting in 2021 when she takes over?

Frankel: I think cost-cutting and efficiency. Most banks, Citigroup included, have giant branch networks right now. And there's a lot of redundancy in the branch networks, for example. I mentioned embracing technology, which is a big efficiency thing. It's not just to say I have the coolest mobile app, it's because having a cool mobile app saves the bank money. I mean, Bank of America has said that every transaction done by their mobile app cost them one-tenth of what a teller system transaction does. So, I feel like her focus is going to be on efficiency and cost reductions at first and trying to make sure that the bank is running as efficiently as possible, kind of, bring it into the new fintech era.

Moser: Yeah. Well, that sounds like a good idea there. Yeah, bringing things into the fintech era, efficiency, that's an interesting statistic you presented there in regard to Bank of America, and I fully believe it. I mean, having worked at a banking center for a couple of years. Yeah, you walk out of there, kind of, scratching your head a little bit today thinking, man, you just don't need as much of that stuff today as perhaps we once did. So, we certainly wish Ms. Fraser very well, and we'll be keeping an eye on all of her progress starting next year, 2021. So, congratulations again, and hopefully this bodes well for Citigroup shareholders for the coming years.

Let's jump into another topic here, some news that just came out recently, this was a bit surprising given what we know about Warren Buffett, Charlie Munger, Berkshire Hathaway, their general philosophy on things that we've seen throughout the years. The news that Berkshire Hathaway is actually going to be making an investment in Snowflake, which is an IPO that's coming up. Now, the IPO investment alone is really the part that, kind of, turned everybody's heads. Before we jump into that, Matt, real quickly, for the listeners, what is Snowflake exactly?

Frankel: Well, Snowflake, [laughs] I'll say, it's a company that's not Warren Buffett's wheelhouse. And it's not really a company that's in my wheelhouse either; I'm not a tech guy that much. It's a cloud-based data solutions company. I'll tweet out a good article one of our colleagues wrote about the company. But it's a business that I wouldn't understand that well enough to invest in right off the bat. So, I'm really surprised that Buffett did. But, yeah, it's a play on cloud data, is kind of the short version of it.

Moser: Yeah, that's what struck me initially was, it just doesn't seem like the kind of business that's in his wheelhouse. And while I applaud anyone, any investor trying to expand their circle of competence, I mean, I don't know, for me, this was a bit of a head scratcher, but then you start thinking about it, and seeing how the investing strategy at Berkshire Hathaway has taken shape over the last several years with Todd and Ted doing so much there. Do you feel like this is more Warren Buffett or this is more Todd and Ted?

Frankel: Oh, it's hands down Todd and Ted. So, Buffett himself has actually spoken out against IPO investing. At the 2016 annual meeting, I have the quote right in front of me, you don't really have to worry about what's going on in IPOs, people win lotteries every day. So that's one quote. And then in 2019 he confirmed to CNBC that in 54 years Berkshire has never bought an IPO under his tenure. They came close, StoneCo, the one that we cover. He came close. StoneCo went public October 25th, 2018, and Berkshire bought its stake four days later. So, that's pretty close to investing in an IPO. [laughs] So, I'd put an asterisk next to that statistic. But the last IPO Buffett bought, do you have any idea what it was?

Moser: No, I have no clue.

Frankel: The last IPO Warren Buffett bought was Ford in 1956.

Moser: Wow!

Frankel: So, it's been a while. So, this is very uncharacteristic for Buffett, which is why I'd say all day this is a Ted and Todd investment.

Moser: Yeah, that is fascinating. I didn't realize that about Ford. Now, that certainly seems very much in his wheelhouse, and I can understand that. But yeah, I mean, when you think about Snowflake and what they do, and I agree with you in that, when you talk about any kind of a data analytics company, something involving data, that's a big world, that's kind of like security, kind of like internet security. And it's a difficult industry to fully understand; there is so much involved. And it's difficult to fully understand what the competitive advantages of any one business could be.

Now, it certainly seems like there's a conviction there and the team there feels comfortable in investing in that IPO. And, you know, interestingly I saw Google [Alphabet] is investing in Amwell, which is a telemedicine provider, is going to be going public soon. And it also looked like Google was looking to make an investment in the business, add IPO as well. Separate of the IPO, but investing in the business nonetheless.

And so, it's interesting when you see some of these businesses that pursue these markets that are going to be increasingly relevant, whether it's telemedicine or data management or big data. I mean, those are parts of the market that are going to become increasingly important.

And so, yeah, I guess my only concern there is, just like you said, they don't really invest in IPOs and that's for a reason. I think it's probably for a lot of the reasons that I tend to not invest in IPOs. There's just so much going in there that you don't know about, you need to give these companies a little time to get things going, right, to get their feet under them and live life as a publicly traded company.

I mean, is there something that has you concerned about this move? Or is it going to be something that's relatively meaningless in regard to the actual amount of money that they are investing?

Frankel: Well, they're investing a total of about $600 million in it. So, Berkshire is buying $250 million in the IPO, it's a private placement at the same time. Salesforce, it's also worth mentioning, is also investing alongside Berkshire. So, that's pretty good company ...

Moser: Yeah, I saw that. Yeah, that's a good point there.

Frankel: And they're also buying about 4 million shares of Salesforce from an existing investor. So, all in all, it's going to be a stake of over $600 million, it represents about 2.5% of Snowflake, but by Berkshire standard, it's still a pretty small investment. So, I'm not too worried about it, I'm 99% sure it's coming from Ted and Todd, who are responsible for starting Berkshire's Apple investment, which was really successful. They are responsible for putting Amazon in Berkshire's portfolio, for buying StoneCo, which has been a very successful investment. So, all in all, I'm really not that concerned, these are two guys who are, kind of, more tech-minded than Buffett is, and their early results have been very impressive.

Moser: Yeah. And you said $600 million total. They have somewhere in the neighborhood of $180 billion, is that right?

Frankel: They had $147 billion in cash on the balance sheet at the end of the second quarter. And Berkshire has actually made some pretty big moves in the past month or two. If you remember, they bought the natural gas business from Dominion; they put another $2 billion into Bank of America stock; we talked about that on the show; did a new IPO; they bought those Japanese companies, they have 5% stakes in those Japanese companies. So, Berkshire has been pretty active lately. And that wasn't all Ted and Todd, I mean, the Dominion deal especially, we know was probably Buffett or Munger, other Berkshire leadership. Same with the Japanese companies, where Buffett was quoted in the press release as that being his investment. So, it looks like all around Berkshire, people are just, kind of, finally seeming to be ready to put some money to work.

Moser: Yeah, I mean, it doesn't sound like they're firing that elephant gun, so to speak, but they are taking a lot of little shots there that are starting to add up. It seems like every week or so we're starting to see another headline of a new investment that's been made. And, yeah, I mean that's great to see, I mean, it doesn't need to be an elephant gun, you know, let's see what they're investing in.

Frankel: Yeah, just do something. [laughs]

Moser: [laughs] Yeah, just do because something. Exactly.

Frankel: I mean, anything is better than just leaving a pile of money. I mean, we're not trying to be like Scrooge McDuck here with a giant bin of money. I mean, we want to put our money to work. From the shareholder's perspective, if you could take that $147 billion and even earn half the historic returns of the S&P, it's better than just leaving it sitting there in cash from an earnings perspective.

Moser: I concur. Well, and it probably also raises the question, the longer you leave it there then, you know, I mean, the shareholders, just the drumbeat for a dividend just continues to grow, right? I mean, if you're not going to do anything with it then, you know, do something with it. And so, hey, at least they're doing something with it and that's good. I mean, I definitely like the tailwinds in the market that Snowflake participates in, so I guess it remains to be seen whether this is a company worthy of the investment dollars, but certainly it seems like Berkshire feels pretty good about it. So, I think that should get it on a lot of investors' radar. So, we look forward to that IPO and digging more into Snowflake to see exactly what the team there at Berkshire sees.

Frankel: Yeah. And I'm excited to see where it goes. I mean, I'm just more excited to see that they're actually making some moves now. And I want to see that $147 billion number go down, because it's been a while since we've seen that go anywhere but up.

Moser: That's very true. Well, hey, let's do this, you know, let's wrap up the show today with our ones to watch. We have a couple of stocks to put on investors' radar for the coming week. And, hey, you know, maybe someone at Berkshire is listening and they catch an idea from us, Matt. We can only hope. But what is your one to watch this week?

Frankel: Well, everyone knows I love real estate stock, so I'm going to go with a real estate stock I haven't mentioned on our show yet called Walker & Dunlop that I recently added to my portfolio. The ticker symbol is WD. If you're not familiar, they're a commercial real estate finance company. They specialize in multifamily properties; so, apartment buildings things like that. Right now, they have about a 6% market share. They're one of the leaders, especially when it comes to government-backed loans, like Fannie Mae and Freddie Mac. They have a very ambitious CEO who's delivered great returns for investors in his tenure. He's actually the grandson of one of the co-founders. You know, the company was co-founded, I think, in the '30s and he's third-generation leadership.

And I mean, the execution has just been fantastic when it comes to acquisitions and growing market share. And they have a mortgage servicing business as well. And that portfolio just reached $100 billion, and that's just steady, predictable income. And they're well off their highs, and I mean, I don't think they deserve the discount they're trading for right now.

Moser: Yeah, interesting one there. I think Willy Walker, the gentleman heading up the operation there, I think that Mr. Walker actually came and spoke at Fool HQ at one point. Tom Gardner, our Co-Founder and CEO and, I believe, Mr. Walker know each other. And that's been a company that's been in our universe here at The Fool for a while now. So, good to hear you getting that on your radar.

I am going to be taking a look at Adobe. Actually, earnings come out tomorrow for Adobe on Tuesday. And so, for me, really, you know this is a business I've talked about a lot on a number of our shows. And Adobe, to me, is interesting from a number of perspectives. It's primarily, it's really a digital content, digital media company. They have a really interesting side of the business in document management and have always been referred to as a competitor of companies like DocuSign. But really, for me, Adobe's real strength stands out in its digital content strategy and the role that they serve for so many creators out there. A subscription model, which is really attractive; software company; super, super margins. Just love to see those types of margins. Gross margins touching the 90% range in some cases.

And with earnings coming out, I mean, I'm really just curious to see how they see things looking in the near- to mid-term. Last quarter they did not offer full-year guidance, but they did offer quarterly guidance. And so, we'll see how business comes in compared to that guidance that they offered.

And I compared a little bit to another company, I follow Autodesk. We saw Autodesk's earnings, this most recent quarter, they've seen some tightening of budgets around the world. They've been pushing out pricing a bit to be as customer-centric as possible, given the challenges that everyone is facing out there. So, yeah, it's just going to be, I think, a good indicator of where we are in this pandemic economy today.

The stock has had a great year so far; up a little bit more than 40%, just a tremendous business. They generate a ton of cash. And I personally own shares in it myself. That was one of the positions I built up during the great bear market of March 2020, Matt. [laughs] So, I'll look forward to those earnings tomorrow.

Frankel: What's the ticker symbol, again, on that one?

Moser: The ticker on Adobe is ADBE. But I think that's going to do it for us this week, folks. Remember you can always reach out to us on Twitter @MFIndustryFocus, or you can drop us an email at IndustryFocus@Fool.com. Tell us what your one to watch is. It can be anything, it doesn't have to be financials. You got one that you're watching, one that you think we need to be watching, reach out to us on Twitter, drop us an email, let us know, we'll read it on the air. We're always looking for great ideas and we want to know the stocks that you, our listeners, are looking out for too.

But, Matt, it is really nice to catch up with you. Glad you guys had such a great time at Disney World, glad you got back safely. I think we're one step closer to maybe being able to meet each other again at Fool HQ one of these days and perhaps even tape a show and grab a burger and a beer afterwards.

Frankel: I hope so too. Any word on when that might happen, you know, 2022, 2023?

Moser: [laughs] Let's hope it doesn't take that long. Let's hope it doesn't take that long. [laughs] But I'll make sure and keep you up to speed; it's a little while ago, but hopefully not that long.

But, as always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

Thanks, as always, to Tim Sparks for putting the show together. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.

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