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Here is a look at how American International Group (NYSE:AIG) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass all 6 of the following tests: Score = 2/6

  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 - FAIL
  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 = 2/3

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

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$38.14
MG OpinionOvervalued
Value Based on 3% Growth$14.36
Value Based on 0% Growth$8.42
Market Implied Growth Rate21.45%
PEmg51.40
PB Ratio0.76

Balance Sheet - 9/30/2013

Total Debt$42,231,000,000
Total Assets$540,744,000,000
Intangible Assets$0
Total Liabilities$441,951,000,000
Outstanding Shares1,472,340,000

Earnings Per Share

2013 (estimate)$5.62
2012$4.44
2011$8.60
2010$14.75
2009-$86.30
2008-$753.90
2007$47.80
2006$107.00
2005$79.80
2004$75.00
2003$70.60

Earnings Per Share - ModernGraham

2013 (estimate)$0.99
2012-$55.04
2011-$107.79
2010-$155.37
2009-$200.66
2008-$201.51

Conclusion:

American International Group is a company that is coming out of a very dark point in its history. At this point in the turnaround, the company has yet to satisfy Defensive Investors or Enterprising Investors. Defensive Investors look at a ten year history and require positive earnings and dividend payments throughout that period, but since American International Group had such large losses at the heart of the financial crisis, the Defensive Investor is not yet comfortable with the company.

Enterprising Investors look at only a five year history, so they are much closer to accepting the company as a potential investment, but the loss in 2009 still eliminates the company from contention for this investor type. Therefore, Intelligent Investors seeking to follow Benjamin Graham's value investing methods may wish to seek other opportunities by reviewing ModernGraham's list of Defensive and Enterprising Companies. From a valuation standpoint, the company has seen some growth, but the market is currently implying a growth rate above what has been seen historically. As a result, the company appears to be overvalued at this time.

What do you think? Do you agree that American International Group is overvalued? What would be your assessment? Is the company not suitable for Defensive Investors or Enterprising Investors?

Disclosure: The author did not hold a position in American International Group (AIG) at the time of publication and had no intention of changing that position within the next 72 hours.


Source: ModernGraham Valuation Of American International Group