Is AIG Still A Good Value?

In late August, we suggested that the consensus among hedge fund managers that American International Group, Inc. (NYSE:AIG) was a good stock to buy, combined with the fact that the stock was low priced in terms of both its earnings and the book value of the equity, made it a good value. Read our article on AIG. The government-rescued insurance company’s share price is up 5% since the beginning of September, carrying it to a 48% gain year to date. However, it has underperformed many financial stocks over the past couple months.

FAIRHOLME (FAIRX) Bruce Berkowitz

Bruce Berkowitz’s mutual fund Fairholme was heavily invested in American International Group, Inc. at the end of June. The fund owned about 88 million shares, giving it a position with a market value of nearly $3 billion. This made it by far the largest position in Fairholme’s 13F portfolio by market value (find more top stocks from Fairholme). Billionaire Leon Cooperman’s Omega Advisors more than tripled its stake in AIG during the second quarter to a total of 4.6 million shares, making it one of the ten largest positions in Omega’s 13F portfolio as well (see more stock picks from Leon Cooperman).

The company’s 10-Q for the second quarter of 2012 shows a small increase in revenue and a 27% increase in earnings compared to the second quarter of 2011. Premium revenue was actually down slightly, with top-line growth driven by capital gains. AIG’s revenue was also lower on a q/q basis, as was net income. In the first half of the year, cash flow from operations came in at $1.6 billion (versus a decline in cash flow from operations in the same period of last year) and cash flow from investing activities remained strong. In terms of multiples, American International Group, Inc. is still cheap. At a P/B of 0.6, it still trades at a large discount to book value. At 10 times forward earnings estimates and a five-year PEG ratio of 0.4, sell-side analysts are highly bullish on the stock as well. There’s considerable risk in staying with AIG (and its beta of 1.9 signifies substantial exposure to the market) but it still looks undervalued to us.

We would compare AIG to other property and casualty insurance companies such as The Travelers Companies, Inc. (NYSE:TRV), ACE Limited (NYSE:ACE), The Allstate Corporation (NYSE:ALL), and The Chubb Corporation (NYSE:CB). These companies are generally priced at similar multiples to AIG in terms of forward earnings estimates. Chubb has the highest forward P/E, at 13, and its business was generally unchanged in the second quarter from the second quarter of 2011. It certainly doesn’t seem to be as good a value as AIG, though its dividend yield and low beta of 0.5 give defensive investors at least some reason to own it. ACE, during the same quarter, saw its revenue and earnings come in considerably lower than a year earlier (net income was down 45%). It carries a forward P/E of 10, equivalent to AIG’s, with a lower expected growth rate in addition to its lower historical one. It seems to be overvalued relative to AIG as well.

Allstate and Travelers are in the same territory in terms of forward P/Es, at between 9x and 11x. Both of these insurers trade at slight premiums to book value as their P/B ratios are 1.1. So on an earnings basis they are even with AIG (though their expected growth rates are considerably lower) but on a book basis they are considerably more expensive. Their revenue growth rates in recent quarters have also been more modest (though, in its most recent quarter, Travelers managed to more than double its net income versus a year earlier).

We like AIG better than its peers in the insurance industry. Even if its growth rate slows, and falls below sell-side expectations, it should still be high enough to justify a slightly better stock price.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!