Big Upside Potential
Price to book value ratio has been traditionally considered a good tool to analyze insurance companies. As we can see, AIG used to trade at a considerable premium to competitors like The Travelers Companies, Inc. (NYSE:TRV) and The Allstate Corporation (NYSE:ALL) due to its higher profitability and international growth prospects. The situation is now reversed, as AIG trades at a big discount to book value in the area of 0.6.
Not only is AIG comparably cheap versus other companies in the industry, but the whole insurance sector is trading well below pre-crisis valuation levels. If the economy in general and real estate sector in particular continue improving, insurers like Travelers and Allstate have room for valuation expansion, as investors start pricing in a more optimistic scenario. Needless to say, this should be bullish for AIG too.
Besides, the company has been aggressively repurchasing stock over the last year. Since those repurchases are done at a price to book value ratio below 1, they increase book value per share. The company gets more than $1 in accounting equity value for each dollar it uses to buy its own stock, so as long as the purchase price is so low a buyback will be very positive in terms of book value per share.
In addition to strengthening its balance sheet and refocusing on business profitability, AIG has been capitalizing the opportunity to repurchase shares at depressed levels, and that’s a smart move that has the potential to benefit shareholders in a big way in the middle term.
AIG has made a remarkable recovery over the last years, and the company is now focusing on business profitability and rewarding shareholders with stock buybacks at conveniently low prices. Considering that they are still trading at bargain valuation levels, shares of AIG are offering an attractive upside potential for investors.
The article Big Upside Potential for AIG originally appeared on Fool.com and is written by Andrés Cardenal.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.