AIG's price target is upped to $47 from $41 at Deutsche Bank which says bears - overly focused...


AIG's price target is upped to $47 from $41 at Deutsche Bank which says bears - overly focused on low ROE and earnings - are ignoring the value to be unlocked by the company's cash-generating assets. Seeing improvement in the underwriting ratio on the insurer's commercial lines, Goldman suggests EPS of $4.37 in 2015, implying 20% earnings growth.
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Comments (2)
  • ahouseoforange
    , contributor
    Comments (592) | Send Message
     
    Sensible Germans at Deutsche! They are making a very valid point which I happen to totally agree with. Some folks are continuing the drumbeat to get the stock price down so they can scoop up more at more favorable prices after missing the boat earlier on. We are not likely to head much lower from current levels.
    26 Feb 2013, 08:21 AM Reply Like
  • ahouseoforange
    , contributor
    Comments (592) | Send Message
     
    Also, some folks seem to not understand the advantage of the warrants. If I buy 1000 shares now at $38.00 it costs me $38,000 obviously. For $38,000 I can buy about 2,750 warrants at current prices. Let's say 5 years from now the stock is trading at book which would likely be in the $90 range give or take. The stock would be worth $90 x 1,000 = $90,000.00. The warrants would be worth $90-$45 (strike price) = $45.00 plus the time value remaining 5 years from now which would be another 2 years and 11 months or so. Let's assign the latter a value of $12.50 which give us a total warrant value of $57.50 in 2018 mind you. ($57.50 x 2750 = $158,125.00

     

    So the stock would have appreciated by about 136% while the warrants would have increased by 315%. Even if you give a value of $.0.00 to remaining time value of the warrants from 2018 forward (not realistic obviously) you would end up with a warrant value in 2018 (based on a stock value of $90.00) of $45 x 2,750 = $123,750.00 which means the warrants still outperform the stock by a large margin. The warrants are worth nearly 40% more than the value of 1000 shares in 2018 were the stock at $90.00 with the time value set at zero with nearly 3 years of time left on them!!!!

     

    Keep in mind the stock was at $60 shortly after the re-IPO about two years ago. Back then there was tons of uncertainty still to resolve i.e. getting value from the AIA IPO/share sale, selling off various other units especially ILFC, the FED being able to sell the Maiden Lane portfolios and earning a decent return, selling the Treasury's stake of over 90% of common shares in AIG which some said would not happen for years and years. Here we are now in February, 2013 and literally ALL of the above took place and took place very successfully. I don't even care if the stock gets to $60 in the next few years. For warrant holders it would be ideal for the stock to remain below book value by some margin until the next buyback is announced so such a buyback can have maximum effect on book value, ROE and EPS etc. AIG is right to focus on optimizing their capital ratios at this time to get off on the right foot with their new regulator the FED. No doubt (look at the $1.25 billion bond repurchase announced 2 weeks ago) they will be successful in reducing their debt and removing the debt carrying the higher interest rates (for no reason any longer). Make no mistake about it there will be a buyback announcement. It may not come soon enough for short-sighted day-traders and speculators but who cares about these guys anyways. Let the long-term story play out and with patience tremendous returns can be had by prudent long-term investors.
    26 Feb 2013, 08:50 AM Reply Like
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