Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how American International Group Inc (AIG) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): American International Group, Inc. (AIG) is an insurance company. The Company provides a range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services. Its various offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. The Company’s AIG Global Benefits Network provides administrative and marketing services to insurance companies offering benefit solutions to multinational employers. AIG Global Benefits Network can develop global benefit plan solutions for multinational clients by tapping the coverage options offered by carriers throughout the network. AIG operates through two segments: Commercial Insurance and Consumer Insurance. Commercial Insurance is a provider of insurance products and services for commercial and institutional customers.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$67,534,221,034||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Fail|
|3. Dividend Record||Dividend Payments for 10 years prior||Fail|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-102.53%||Fail|
|5. Moderate PEmg Ratio||PEmg < 20||10.58||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||0.67||Pass|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Pass|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$71.32|
|MG Value based on 0% Growth||$41.81|
|Market Implied Growth Rate||1.04%|
|% of Intrinsic Value||27.48%|
American International Group Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $-109.06 in 2011 to an estimated $4.92 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.04% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.
American International Group Inc performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||3|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep2015|
|Shares Outstanding (Diluted Average)||1,279,073,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.90|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.92|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.