Insurance for Your Portfolio
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The crash of 2008 left the world with at least two things, bad experiences and battered down companies. The companies that survived the crash are now available at cheap valuations, have the opportunity to stage a turnaround, and give their investors returns better than most indices. For investors who are over their bad experiences and are looking to capitalize on the cheap valuations of those beaten down companies, American International Group (NYSE: AIG) may turn out to be a good investment choice; here are a few reasons why.
Among the US insurance companies, American International Group is the largest player in the pack. The company with a market capitalization in excess of $58.7 billion has operations in over 130 countries. The insurer has 63% of its $21.3 billion revenues coming in from the domestic markets; while 13% come from Asia. During the crash, the government staged a record bailout of $182.3 billion, buying 92% stake in the company. The stake has been reduced to 53% since then, with AIG buying back its shares from the treasury. The company has $11 billion in liquid cash and as AIG gains more stake with the treasury planning to sell $18 billion worth of shares; it would be able to make decisions more freely, more aggressively, which could mean rapid expansion and tactical acquisitions and ventures.
In the recent results, the company reported quarterly net income to be $2.3 billion, which is up 27% from $1.84 billion in the year ago. Earnings from the business division Chartis shot up by 20%; while the earnings from another division of AIG, SunAmerica Financials, surged by 29%. The topline rose by 8% along with a 118% increase in revenues from other operations. The results turned out to be way better than expected, with an EPS of $1.06 against an estimated EPS of $0.57.
Recently it was also announced that the company will be taking the Air leasing division public. The company expects to raise a capital of $6-8 billion which would be infused into AIG, and alongside the parent company would become smaller. By such a move, the company expects to push up its profit margins, which means a possible upside for the shares.
AIG faces competition from Met Life (NYSE: MET) and Prudential (NYSE: PRU) in the insurance segment. In terms of returns the company has been outperforming its peers for the past 1 year by giving 44.15% returns in 2012.
From the comparison table, we can very well see that AIG is the most undervalued stock. The company enjoys the best net profit margins, more than 300% higher than its nearest competitors .The debt/equity ratio also tops the list, making AIG the best investment choice altogether.
|
Company |
P/E |
PEG |
Debt/Equity |
Net Profit Margin |
|
AIG |
3.01 |
0.2 |
0.71 |
33.24% |
|
Met Life |
5.6 |
0.46 |
1.00 |
9.6% |
|
Prudential Financials |
8.14 |
0.70 |
0.72 |
6.48% |
AIG also outperformed its competitors in terms of revenue growth.
Conclusion
AIG might have had bad times in the past, but past performance does not indicate future performance. Many leading hedge fund managers are building up their positions in AIG, which to an extent shows that the big players think the bad times are over for the company. Additionally the company posted good results, which beat the market expectations by 53%. The stock has been outperforming its peers for the past one year, giving a 44.15% return last year. And to top it off, the stock is fundamentally better than its peers. The Treasury announced that it would be selling $18 billion worth of stock, which would mean added internal control of AIG, and eventually be better for the company. The company has all the ingredients of a turnaround, and we give the stock a Foolish buy rating.
PiyushArora 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.
