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Summary

  • Sanford Bernstein came out with comments today that American International can double over time.
  • The shares are undervalued compared with peers, and sport an attractive valuation.
  • The company has several catalysts that could boost the stock price nicely over the next 1-2 years.

Sanford Bernstein came out with comments today that insurer American International Group (NYSE:AIG) can double over time from current levels as American International "once again becomes a great company and trades at a premium to its peers". That seems a reasonable assumption if an investor's time frame is in the 3-5 year range, although debatable on a shorter time horizon. That being said, I believe good upside remains for this one-time pariah and undervalued insurer over both a near-term and long-term basis.

Company Overview:

American International Group remains a leading international insurance organization. The company received over $182B in bailout funds in the financial crisis, which it has fully paid back. The financial firm still has a major footprint and a market capitalization of approximately $75B, even after selling off several major businesses.

Valuation:

The company is one of the few major financial firms that continues to sell for under book value, even five years from the end of the financial crisis. 2013 year-end tangible book value was just north of $64 a share. The stock currently hovers just over $50 a share. Insurers like Allstate (NYSE:ALL) and Travelers (NYSE:TRV) currently go for ~20% over book value in ways of comparison.

The shares go for ~11x trailing earnings, and revenues are starting to grow again, as asset divestitures are mostly complete at this stage in the company's restructuring.

Catalysts:

One of the biggest catalysts will be that the company will narrow its book value valuation discount to other insurance firms over time. Long-term investors should get a 50% boost just from this development.

Second, interest rates should rise over time from these near-historic lows. This will boost the investment returns within insurers' portfolios nicely, and also improve sentiment on insurers in general.

Finally, as American International continues to slowly remove the restraints on it from regulators and the Federal Reserve; it should be able to substantially boost its dividend payout and stock repurchases. The company recently boosted its quarterly dividend by 25%, and now yields around 1% on an annual basis. The payout ratio is just over 10% of earnings, so payouts can go much higher in the future.

S&P has a "Buy" rating and $59 a share price target on the shares. This seems a good "bogey" over the next 12 months. Over a longer time period, the shares can move much higher. BUY

Source: AIG: 'Double' From Here Debatable, But Good Upside Remains