AIG price gained over 370% from its recent low of $13.30 and closed Friday at $50.23.
Many analysts claim that the company's book value is negative and its stock should be worthless for its common shareholders.
Yes, if AIG trys to sell all of its current assets piece by piece, the proceeds may not be able to pay off the government bailout money.
In normal case, the company should file for chapter 11 and no money left for shareholders.
But in the case of AIG, the situation is quite different.
- First the government baiout will prevent it from bankruptcy;
- Second the company started making money ($2.30 per share in its latest quarter);
- Third, the profit should be sustainable in the following quarters as US and world economy showed a strong sign of recovery. Analysts in general predict that the company will earn over $10.00 per share next year.
Therefore, the company stock has its value.
Let us take a very simple example:
Suppose my company's total current assets is -$10 million and my debt holders are not asking me to return the money to them right now.
In addition, my company starts to make money from now at the rate of $5 million per quarter. In that case, we can return all the money we owned to them in six months and the company will have a net worth of $10 million in a year.
What is more, my company's worth should be far more than the $10 million net worth, as in most cases people valuate a company based on its PE and PE of 10 is the normal case assigned to insurance companies.
In the case for AIG, if the company can earn $10.00 per share next year, the stock may be valued at $100.00.
Look at TEN, TRW, (two auto parts companies) and CAR, DTG (car rental companies). Most are still lossing money and all have big debt load. But they are all traded at near year high, anywhere between $10 to $20 now.
Also several big airline companies all have negative book values at the moment. Yet their stock prices turned bullish after their recent earning reports such as LCC, UAUA.
First, debt holder relaxed the rules for these companies to repay their debt;
Secord, investors believe that those companies will make big profit next year as economy has a high probability of out of recession.
Wall Street is always forward looking.
We all know that insurance companies used to be profitable. And in normal cases the profit is very stable. That is why Warren Buffet bought many insurance companies in his early investment years and made big success.
Now the worst in US economy recession is about over and the insurance business will return to normal soon. We expect ,AIG included to return to profitable soon.
That is why AIG, FRE, FNM, C, BAC, RDN, MTG all made remarkable come back recently.
Disclosure: our fund owns AIG since $13.48, FRE, C, LCC.