Let me start by saying that my analysis of AIG (AIG) uses extreme discounting methods for a margin of safety which I believe should always be considered when evaluating the intrinsic value of a company. As a young investor, I must also say that my time horizon for my investments extends beyond 30 years and I intend to use that time to my advantage by finding stocks which should realize their true value well within that time frame.
Straight from their September 2012 Quarterly report:
"American International Group, Inc. is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States."
Such a strong position in not only the US market, but markets across the globe as well would command a hefty premium on the stock, would it not?4 Of course not!
Trusting Today's AIG
From its value five years ago, AIG has lost over 97% for investors. Because of this, many investors still feel that if AIG has lost hundreds of billions before, there is still the danger of losing hundreds of billions of dollars again. This sentiment has kept the stock price down, while the company itself has restructured itself under government regulation. Although normally I would agree that risk in business never goes away, I feel that investors should look at regulation as an assurance that type of losses seen by AIG in the past will more than likely not happen again.
Because market beating returns are impossible to obtain by always agreeing with the market, let's put on our investing caps, and allow the numbers speak louder than our emotions.
Tangible Book Value
Because it's easy for a company to stretch an imaginary number while calling it an asset (goodwill), I like to take the approach of examining a company's tangible book value, and I'll tell you right now, AIG has quite a lot of it. $101.6 Billion to be exact.
With the current number of shares (about 1.48Billion) the TBV per share of the company amounts to about $69 a share. As a conservative investor, this value caught my eye (with share price today trading for about half of that). Surely this is too good to be true!
But it's not.
The numbers are there, and stronger than ever. In fact, the equity as a percent of total assets has increased in a very large way. In 2007 (prior to the crash), Equity as a percentage of Total Assets was 9.7%. According to the most recent quarterly report issued this November, that percentage has grown to 18.6%. In my mind, this is a very strong case that the company has changed its ways from its ugly past.
Although the de-leveraging of the company seems like a great step forward, the even better part of this deal is that you can buy this healthier company at an excellent discount!
I know I have already said so, but the value here is right in front of us. I'll even discount the current Book Value by 35% just to convince you. Even with Tangible Book Value discounted by 35%, you would still be buying a company presently worth about $44 per share. Given Friday's closing price, this represents an opportunity for 33% appreciation, or the same as buying a 1$ for 75 cents. And that is only IF AIG were to be stagnant the entire time while letting its share price catch up.
Is It Too Late?
Even though the share price has appreciated 40% over last year's lows, the value that is available to investors today is nearly the same if not better than last year. Before the share buybacks (according to 10-K filed for 2011) shareholder equity was $104B, and the level of shares outstanding was 1.8 Billion.
Book value per share then would be $58 per share in 2011, versus about $69 per share in 2012. Although this is only represents 18% of the stock's appreciation, I still feel that investors are receiving a better deal today than last year due to improvements and the soon to be nonexistent interest held by the government.
If you still aren't convinced, my final case for buying AIG at current prices is that AIG is not sitting still! This last quarter brought in an operating cash flow of 2.8Billion, and Revenue YTD has grown over 13% from last year. Although the revenues for the quarter are still not where they used to be for AIG in 2007 (down from $29 Billion in 2007 to $17 Billion in 2012 during the third quarter), they are certainly taking steps in the right direction.
All of these points present a strong case for value for AIG's shareholders. I'll be honest, I would not be writing this article if I did not think that AIG's worst days were already behind it. The company has already freed itself from most of the government interest in the stock as part of the bail-out deal, and I feel that once the rest of Wall Street sees this new and improved company, anyone who invested in their stock will see market-demolishing returns.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AIG over the next 72 hours.