Everybody knows AIG (NYSE:AIG). Everybody hates AIG. For value seekers, AIG is a fantastic undervalued asset as the market (read: institutional investors) expresses its disbelief about the company's progress over the years. How else could anyone explain a P/B ratio of 0.55, a near 50% discount from conservative book value?
Not only did AIG make an operational comeback with strong earnings growth y-o-y, but it also, and this is remarkable, survived the financial crisis with no real reputational damage. Normally, this should have translated into lower revenues or earnings as customers and clients turn their back on the company as a consequence of the bailout.
AIG has repaid its government assistance, similar to financial firms such as Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). Bailout money extended to AIG via loans has been completely repaid (special purpose vehicles Maiden Lane 2 & 3 are to be named in particular). A year-and-a-half ago, the Treasury owned 92% of AIG common stock; this ratio is down to about 15% now - a massive and fantastic accomplishment on the part of management that pushed forward in difficult times.
I personally would have expected that AIG purchased back more of its stock (more than the $5 billion announced). Given the low leverage ratio of AIG and the company's accessibility of the debt capital markets, I would have wished that AIG issued bonds and used the proceeds to repurchase shares from the Treasury. Assuming a 10% ROE and a 50% discount from book makes this a no brainer - particularly if refinancing costs stand at 2-4%.
Given the pendulum of fear, disbelief and euphoria, it would come as no surprise to me if AIG's stock takes off once the Treasury formally announces its exit. This scenario would make a perfect wrap-up story about the remarkable turnaround of AIG on CBS 60 seconds. Since I assume that institutional investors cannot sell their investment committees an AIG investment right now, a free AIG is likely to be more interesting to these folks.
AIG has made tremendous progress in restructuring its business, became leaner during restructuring, has divested non-core assets, posted solid earnings growth and continues to pay down the government. I believe AIG needs to be strongly revalued right now, but at the latest when the government formally exits. Given the conservative capital structure with low leverage ratios, a discount from book value of roughly 50% is really extreme. I personally have a price target of $66 on the stock for the market value to be more in line with book value. Better performance results and additional stock purchases (for example with proceeds from AIA share sales) are not yet incorporated in this scenario. For me, AIG remains a strong buy under these circumstances.