AIG Selloff Was Overdone; Shares Have 50% Upside - Barron's

Barron's calls U.S. insurance giant AIG (AIG) a screaming buy, insisting last week's reactionary selloff was overdone. Shares hit a five-year low after a disclosure that AIG's auditors found "material weakness" in the company's accounting systems, which forced it to boost a $1.6 billion writedown on its credit insurance to a whopping $5.2 billion. Investors worry that since the writedown only covered losses until the end of November, things could get worse once the books are adjusted to reflect an even-weaker December and Q1 2008.

Barron's suggests the worry is largely a big to-do over nothing, because the accounting loss is just that -- a book-based change based on complicated accounting conventions that will have little-to-no effect on the company's bottom line. The mark-to-market writedowns will make their way back into AIG's earnings over the coming years as the mortgage loans backing the CDOs pay down. In a recent analysis, the absolute worst pretax loss it could suffer on its $63 billion insurance portfolio is just $590 million, not much considering AIG's $104B market cap and book value of $42/share. At Friday's $45.50, shares trade for just 1.1x book value -- which should hit $46.87 by year-end. Bear in mind, shares traded for 4x book value less than ten years ago. Barron's says the stock could jump nearly 50%.

Comments

[CrossProfit:]

We agree, however the question is not 'if' but 'when'. We recently lowered the CrossProfit e-line from $70 to $60 (30% gain) over the next 6 months or so, reflecting the uncertainties.

In our opinion, the remaining 20% gain will come only after the CDO issue is totally under control and there are no more surprise write downs by anyone for at least a full quarter.

See www.crossprofit.com/vi... for details.

The longer the 'financials' drag out the write downs, the longer it will take to restore confidence in the system.

Likewise, articles appeared in the press lately saying that lawyers are advising private equity and other buyers to renege on their acquisition commitments and just pay the reverse break-up fee, simply because the debt is selling at $0.80 to the $1. Essentially they are advising the system to shoot itself in the leg. There is a big difference if a buyer wants out because the company is no longer worth what they offered for it and between a deal getting canceled because the banks can not turn over the debt at a profit.

The former is legitimate and is the purpose of a reverse clause. The latter, well if the buyer still deems the acquisition worthy and the buyer is the one that has to pay off the debt, canceling a deal because a bank can not book an immediate profit is not the intent of a reverse cancellation fee clause.

The only resulting consequence would be further pressure on already existing debt somewhat similar to a run on a bank. Should any of the bankers attempt to pull off a stunt like this, expect everyone to take a hit, including AIG.

CrossProfit (consensus)

2008 Feb 17 06:50 PM

[jahowle:]

why would I want to own a stock that has added almost no shareholder value in 10 years and any value an investor has recieved has only come from the small dividend.

2008 Feb 22 12:51 PM

[CrossProfit:]

If you have been following this, over the past two weeks AIG has gone from $45.50 to $52.25, a 15% gain.

Now that AIG is half way there, the $60 target price doesn't seem so far fetched. There may be a small pull-back over the net few days. This is normal and does not negate the overall trend.

Kudos to SA editors for keeping this article on top of the pile!
(You can place another lead article next week for the pull-back...but don't forget to post another when it is time for the next leg up.)

CrossProfit

2008 Feb 28 08:26 AM

[sunx:]

Today is May 26,2008.
On Friday 5/23/08 , AIG closed at $36.95.
The entire market took a huge hit last week.
I'm interested in anyone else's take on the present situation in the market and in AIG in particular. Pray tell if you have some insight.

2008 May 26 11:00 AM