Is this Turnaround Project a Good Buy?
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some years ago, it seemed as if AIG (NYSE: AIG) was a hopeless case. Its share price was decimated and its cash position was so bad that it required a very large government bailout to stay in business. Much of this situation was due to a number of management mistakes which turned a once-great global insurance company into a government and taxpayer project. Now, following the US governments successful secondary offering of some of its stake in the company, and a wave of restructuring efforts, it may be worth appraising AIG once again.
Uncle Sam’s $18 billion offering of AIG stock is the largest secondary offering in US history. Defying most market commentators’ wildest expectations, the government actually made quite a substantial profit from its turnaround of AIG. The Treasury recovered all the $182 billion dollars it spent on the company, and more. The US government is left with about a 21.5% stake in the company, which now appears to be doing rather well at the moment, and is selling at a steep discount to boot.
Most attractively, AIG is trading at around a 40% discount to book value. Currently the price to book sits at .62, compared to a fairly low industry average of .81. Since December last year, AIG has grown its book value by 13%. Moreover, the stock trades at only 2.9x earnings, compared to the 14.4x industry average. Hartford Financial Services (NYSE: HIG), an American competitor, trades at a massive 121x earnings. Metlife (NYSE: MET), another competitor, is far more reasonably priced at 5.5x earnings, but has a similar amount of debt to AIG with a LT Debt to Equity ratio of over 60%. Overall, AIG seems a fair bit cheaper than its rivals.
After a few years of pretty awful earnings, AIG finally seems to be turning a profit with healthy EPS beats in both Q1 and Q2 of this year. Chartis and SunAmerica, AIG’s two most important brands that together account for about 90% of revenue, have rebranded back to AIG, which is a positive showing of sentiment for the long-troubled insurer. Another positive tiding for the company is SunAmerica’s deal with Hartford Financial for the acquisition of Woodbury Financial Services, an advisory group with over 1,400 independent advisors. Additionally, the company has returned $13 billion to shareholders in the form of buybacks year to date.
The outlook is a bit hazy however, and S&P has warned it may cut AIG’s credit rating over the next few years now that it no longer has such strong government support. According to S&P, AIG’s earnings do not sufficiently cover its obligations for a company of its size. Also, this afternoon Sterne, Agee and Leach cut their 2013 EPS forecast for AIG, citing the difficulty of identifying near-term capitalists as their main concern. They remain positive about the firm’s long-term prospects and ongoing capital management. Investors are warned to take these factors into account when gauging AIG’s risk profile. Also, please note AIG’s 3.44 beta.
Opening a long position in AIG would certainly not be free of risk, or even a lower risk investment, due to its troubled past and high volatility. However, for those willing to take a gamble on a very inexpensive turnaround project, AIG might be interesting. The firm has been doing a lot better since the bail out and actually seems to be making money again. It remains to be seen however how the firm manages to perform in the second half of the year, as well as the stress tests it will be subjected to in 2013.
DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
