The federal government officially closed its bailout of AIG early last week, selling the remainder of its 15.9% stake in the company. With the completion of its deal, investors can buy an insurer that’s expected to make close to $36 billion in revenue next year at only 0.7 times sales. Wall Street expects AIG to average 14-15% annual EPS growth over the next five years, but the markets are valuing this potential at a mere PEG of 0.16. Clearly, there’s still a bit of “All Investments Gone” sentiment tied to this stock, but a negative bias won’t hang over AIG forever.
Shares of Southwest Airlines, meanwhile, have been hurt by “high jet fuel prices and an anemic economy” according to Trapeze’s letter. Much like AIG, Southwest is undervalued on a sales, cash and earnings basis, and concerning the latter, this is true even though bottom line growth is expected to pick up significantly over the next few years.
On average, sell-side analysts are predicting an annual EPS growth rate of about 18% through 2017, a significant improvement from the negative growth Southwest experienced last year. A below-average cost base and its ongoing conversion of newly acquired AirTran assets are other key growth drivers. Jet fuel prices also look to be stabilizing as we head into the new year.
Last but certainly not least, Randall and Herb mention that their fund increased its position in Owens-Illinois. The duo discusses that OI’s “overly aggressive growth plans to meet incremental demand caus[ed] self-inflicted bloated costs as it had to ship its glass products from plants farther from customers.” As these costs normalize, the Street expects earnings to rise by 8% in 2013, with slightly higher annual growth predicted over the longer term.
OI’s forecast is slightly below what’s expected of peers like Ball Corp (10.6%) and Crown Holdings (10.2%), but investors aren’t valuing this differential properly. Its shares trade at a price-to-earnings growth multiple of 0.9, while Ball and Crown are around 30% more expensive.
On the whole, Randall and Herbert Abramson of Trapeze Asset Management discuss a fine group of value opportunities, each with their own growth initiatives that can push shares higher over the long haul. OfficeMax is in the midst of an effective cost cutting program and Metlife is in a great position to boost its dividend, while AIG has just been freed of government ownership. Southwest and Owens Illinois, meanwhile, are both seeing their respective cost structures improve heading into 2013.
The best advice that Randall and Herb give their readers is that “[i]t’s indeed frustrating to wait until what’s undervalued is discovered and generally embraced,” but “[v]alue investors need to be patient and stay the course,” adding that it is “[w]orth the wait.”
