American International Group Inc. Quarterly Valuation – January 2015 $AIG

220px-AIG_logo.svgIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  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.  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 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 a global insurance company. The Company provides a range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 130 countries. It diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. It earns revenues primarily from insurance premiums, policy fees from universal life insurance and investment products, and income from investments. In May 2014, the Company completed the sale of 100% interest in International Lease Finance Corporation (ILFC) to AerCap Holdings N.V.

Defensive Investor – must pass all 6 of the following tests: Score = 3/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  3. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 - PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $51.51
MG Value $222.81
MG Opinion Undervalued
Value Based on 3% Growth $83.92
Value Based on 0% Growth $49.19
Market Implied Growth Rate 0.20%
PEmg 8.90
PB Ratio 0.68

Balance Sheet – September 2014

Total Debt $36,223,000,000
Total Assets $527,190,000,000
Intangible Assets $0
Total Liabilities $418,609,000,000
Outstanding Shares 1,442,100,000

Earnings Per Share

2014 (estimate) $4.51
2013 $6.13
2012 $2.04
2011 $11.01
2010 $11.60
2009 -$90.48
2008 -$756.85
2007 $47.80
2006 $107.20
2005 $79.80
2004 $73.80

Earnings Per Share – ModernGraham 

2014 (estimate) $5.79
2013 $0.30
2012 -$56.58
2011 -$109.06
2010 -$158.11
2009 -$202.81

Dividend History

Conclusion:

American International Group qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability or growth over the last ten years and the inconsistent dividends, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from a loss of $158.11 in 2010 to an estimated gain of $5.79 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 0.2% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

Be sure to check out previous ModernGraham valuations of American International Group Inc. (AIG) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on American International Group Inc. (AIG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in American International Group Inc. (AIG) or in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.


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