Today Argus analyst John Eade recommends a value play from the financial sector.
“Our rating on Focus List selection American International Group, Inc. (AIG, NYSE) is BUY and our 12-month target price is $50, up from a prior $45. The company has paid back its debt to the U.S. government, and in our view is poised to grow faster than the industry as it works to lower its high combined ratio.
“AIG shares also appear inexpensive relative to peers. The price/book ratio is 0.7, versus an industry average of 1.2. The forward P/E ratio is 11.7, versus 12.5. However, forecast ROE is below the industry average of 9.9%. In our view, that’s the opportunity. As management reduces the combined ratio in the PC group, we expect profitability to improve, and look for an ROE greater than 10% by 2015. And as the profitability gap with the peer group closes, the price/book gap should close as well. Assuming expansion of the price/book multiple to the industry average, we believe that the shares could rise to $61 by 2015. Our revised target price of $50 implies a price/book ratio of 0.84.
Recent Developments
“On May 2, 2013, AIG reported a 1Q13 after-tax operating profit of $2 billion, or $1.34 per share, compared to $1.62 per share in the year-earlier period. Despite the decline from last year, the results were well ahead of the consensus forecast, which called for a profit of $0.87 per share. This was the fifth substantial positive surprise in a row. Book value at the end of the quarter was $59.39, up 12% year-over-year. Operational ROE was 9.2%.
“AIG shares have been relatively strong performers over the past quarter, rising 15% while the S&P 500 has gained 6%. Over the past year, they have outperformed the market, rising 40% compared to a 20% gain for the index.
“The technical outlook remains intriguing, as the shares have demonstrated a pattern of higher highs and higher lows since establishing a double-low at $20 in 4Q11.”
John Eade, Argus Weekly Staff Report, www.argusresearch.com,
212-425-7500, 5/20/13