Valuation: American International Group (AIG)
Over the next few weeks, I hope to do an individual valuation of each of the components of the Dow Jones Industrial Average. For a brief overview of the Dow, please see our Glance at the Dow - a snapshot of the valuations on March 10. When I have completed the individual valuations, I will put together another overview.
Company Profile: American International Group (AIG) (obtained via Google Finance)
Business and Management Review
1) Is the business simple and understandable?
Insurance is a business that is very simple and understandable. Value investors are taught to love the insurance business because of its tremendous simplicity and its strengths. Insurance is wonderful because the company is able to take in premiums and invest the funds, keeping the profit on the investments after any claims are paid out. American International Group is primarily an insurance company and is thus a simple and understandable company.
AIG has a long history in the insurance business, and that operating history has remained consistent and constant over its history. Financially, the company has achieved a positive net income for over 10 years and has paid a dividend for many years.
Robert Willumstad has been the Chairman of AIG since November of 2006. Over that time, the company has had less than stellar performance, though the circumstances of the financial market have had a significant effect on the performance. Mr. Willumstad seems to have a firm grasp on the company’s issues within the economy and it appears that his strategies for overcoming the credit crunch will help the company in the long term.
The company has the standard investor relations page, with earnings reports, webcasts, etc. In addition, the letter from the chairman in the 2007 Annual report indicates honesty between management and its shareholders as they did not try to mask the poor performance of the company in 2007.
Defensive:
The market cap of American International Group is $110 billion. Pass.
The company’s current ratio (actually we used the total assets and total liabilities instead since this is a financial institution and does not easily lend itself to current ratio use) is about 1.099, below the 2.0 requirement. Fail.
The company has had a consistently positive net income for over 10 years. Pass.
AIG has consistently paid a dividend for over 10 years. Pass.
Earnings have grown more than 1/3 over the last 10 years. Pass.
With a PE ratio (using our Methods) of 13.05, the requirement of under 20 is met. Pass.
The Price to Book ratio for AIG is 1.19, lower than our 2.5 limit. The multiple of PE to PB is lower than our requirement of 50. Pass.
Having passed 6 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe American International Group may be suitable for the defensive investor.
The company’s current ratio (see defensive investor section on current ratio) is below 1.5. Fail.
The company has achieved a positive net income for over 5 years. Pass.
The company currently pays a dividend. Pass.
Earnings are greater today than they were 5 years ago. Pass.
5) Price
The price is less than 150% of the net tangible assets. Pass.
Overall
Having passed 4 of the required 5 tests for the enterprising investor, we feel that American International Group may be suitable for the enterprising investor following Benjamin Graham’s intelligent investor guidelines.
Opinion:
Since the company is currently trading at about $49, we feel it is undervalued at the present time and may be a suitable investment for the defensive or enterprising investor.
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Please note our change in calculation of the growth rate (as posted here: http://www.moderngraham.com/?p=280) has changed our valuation of AIG and our overall opinion.
Also, please remember that even though yesterday the company reported a significant loss for the first quarter of 2008, we look mainly at annual performance and believe there is a chance the company will end the year with a positive net income.
On May 9th, AIG posted on its website a 159+ page analysis of its credit exposures. A dense read to say the least.
The current price of $36.44 is 26% below your “buy” price of $49 and suggests, at least to me, that Mr. Market is going crazy or that AIG may have greater problems than you thought. Any thoughts on that?
Former CEO Greenberg apparently is considering reducing his interest (direct and indirect) to below 10% to establish his unfettered right to comment on the company.
The stock currently trades at a price which is below the price at which they acquired new capital. Those shareholders can’t be happy.
Bottom line: it seems like there is more “blood” yet to fill the AIG Street.
Additionally, the Justice Department yesterday (?) advised the SEC that it wants information on AIG regarding allegations of inflated values of its collateral. It’s my understanding that Justice Department inquiries are not driven by civil litigation.
If AIG’s risks in the subprime residential mortgage market increase, would it need yet more capital? And if so, wouldn’t this drive the price down further? Personally, I think that we’re getting closer to a price point that Mr. Graham would like.
It’s now two months after my last post and AIG is trading at around $12 per share.
AIG is getting closer to a price that might lead to someone to take the firm private — someone like Ace Greenberg.
If you believe that AIG Financial Products’ CDO’s and other swaps are being battered by the “mark to market” rule and not because the underlying analysis was faulty, then, a buyer might ask: Can we simply play out the various contracts and see if we really end up with a loss?
Of course, one might also ask: was the risk analysis wrong because it relied on historical default statistics that didn’t take account of the weak credit position of too many borrowers?
Oh, don’t get me wrong. I think that the stock will further decline.
Additionally, if AIG Financial Products is spun off, someone is going to make a huge amount of money.
Well, the sh*t finally hit the fan and AIG Financial Products, which has been making lots of money playing off of AIG’s balance sheet, is covered in it.
If the stock was at $3.50 when the government took 80% of it, the stock should now be trading at 70 cents a share. It’s lost 50 cents today and I predict will close at around $2.00.
The key point is that the USG has agreed that AIG cannot go bankrupt. I’m going to wait for the end of the day and then buy.
Andrew in Doddsville