Sanford Bernstein is out downgrading American Intl Group (NYSE:AIG) to Underperform from Market Perform and maintaining their $10 tgt.
Firm notes there are no changes to their thinking since their Q2 earnings writeup on August 10. Therefore, the downgrade is strictly a reaction to the big run up in AIG's stock price.
Using their 3-part valuation model, Sanford can examine why they think AIG's current stock price allows very little chance for uncertainty, and fails to corporate considerable downside risk potential.
− AIG's Q2 end book value per share to holders of common equity, after all Government stakes and support are eliminated, was $21.80. They are using an estimated year-end book value per share of $14.30 as their starting assumption for other calculations. This amount included an announced charge of $5bn for Q3 as AIG accelerates amortization of its remaining $13.8bn of prepaid commitment fee (essentially a non-cash equity injection from the Government as part of its support).
− However, if one were to completely eliminate the prepaid commitment fee now, plus goodwill of $6.4bn, AIG would already have negative tangible common book per share of ($7.10). There could be other sources of writedown as well (e.g. deferred tax assets that cannot be applied to future earnings).
− But given that AIG is being supported with other preferred equity, its current negative common equity ignores potential positive optionality from potential operating earnings, capital gains, and asset sales. Bernstein's "upside" scenario captures this, and current registers a midpoint value of about $36 per share. But this scenario is highly uncertain: even our midpoint estimate assumes that a lot has to go right in the future. The midpoint corresponds to an average price/book ratio on the insurance subsidiaries of about 1.05x "normal" book (i.e. assuming cleaned-up assets). This is comparable to where "cleaner" names like TRV and ACE are trading. On $21.80 per share, AIG is trading at nearly 2.1x book, almost comparable to PGR.
− Finally, AIG's current stock price gives virtually no weight to the possibility that the common equity is worth zero. Both the base and upside scenarios show the possibility of zero in any sensitivity analysis, and we are explicitly using a 50% probability of this event. While they would acknowledge that the prospects for AIG employees and insurance operating units appears considerably better than they did 9 months ago, the same cannot automatically be said for common shareholders. Firm still thinks the political risk is considerable, with a very real possibility that the Government reduces support once AIG is no longer deemed a systemic risk.
Notablecalls: I hate to quote Jim Bob Cramer here but here it goes:
'..And then, finally, there is AIG (AIG). Here's one where, honestly, they could sell off every division for double what they are looking for, they could earn 10 times what anyone thinks they could earn, and it will still come nowhere near paying back that money it owes the government. So what happens? You doubled your money after the 20-for-1 reverse split that all the pros know is a "you can run but you can't hide" sucker play! That's catastrophic to the rigorous players; it's natural to the speculators..'
- Realmoney.com
AIG has become a trading vechicle and it kind of feels it running on fumes here. This doesn't mean it cant go to $75 but if you short it here around $43-$44 in the pre market you can cover it in the really low $40's today if the overall market remains weakish.
The call it not yet publicly known. Just remember AIG is a sick-sick stock.
Firm notes there are no changes to their thinking since their Q2 earnings writeup on August 10. Therefore, the downgrade is strictly a reaction to the big run up in AIG's stock price.
Using their 3-part valuation model, Sanford can examine why they think AIG's current stock price allows very little chance for uncertainty, and fails to corporate considerable downside risk potential.
− AIG's Q2 end book value per share to holders of common equity, after all Government stakes and support are eliminated, was $21.80. They are using an estimated year-end book value per share of $14.30 as their starting assumption for other calculations. This amount included an announced charge of $5bn for Q3 as AIG accelerates amortization of its remaining $13.8bn of prepaid commitment fee (essentially a non-cash equity injection from the Government as part of its support).
− However, if one were to completely eliminate the prepaid commitment fee now, plus goodwill of $6.4bn, AIG would already have negative tangible common book per share of ($7.10). There could be other sources of writedown as well (e.g. deferred tax assets that cannot be applied to future earnings).− But given that AIG is being supported with other preferred equity, its current negative common equity ignores potential positive optionality from potential operating earnings, capital gains, and asset sales. Bernstein's "upside" scenario captures this, and current registers a midpoint value of about $36 per share. But this scenario is highly uncertain: even our midpoint estimate assumes that a lot has to go right in the future. The midpoint corresponds to an average price/book ratio on the insurance subsidiaries of about 1.05x "normal" book (i.e. assuming cleaned-up assets). This is comparable to where "cleaner" names like TRV and ACE are trading. On $21.80 per share, AIG is trading at nearly 2.1x book, almost comparable to PGR.
− Finally, AIG's current stock price gives virtually no weight to the possibility that the common equity is worth zero. Both the base and upside scenarios show the possibility of zero in any sensitivity analysis, and we are explicitly using a 50% probability of this event. While they would acknowledge that the prospects for AIG employees and insurance operating units appears considerably better than they did 9 months ago, the same cannot automatically be said for common shareholders. Firm still thinks the political risk is considerable, with a very real possibility that the Government reduces support once AIG is no longer deemed a systemic risk.
Notablecalls: I hate to quote Jim Bob Cramer here but here it goes:
'..And then, finally, there is AIG (AIG). Here's one where, honestly, they could sell off every division for double what they are looking for, they could earn 10 times what anyone thinks they could earn, and it will still come nowhere near paying back that money it owes the government. So what happens? You doubled your money after the 20-for-1 reverse split that all the pros know is a "you can run but you can't hide" sucker play! That's catastrophic to the rigorous players; it's natural to the speculators..'
- Realmoney.com
AIG has become a trading vechicle and it kind of feels it running on fumes here. This doesn't mean it cant go to $75 but if you short it here around $43-$44 in the pre market you can cover it in the really low $40's today if the overall market remains weakish.
The call it not yet publicly known. Just remember AIG is a sick-sick stock.
I would cover 3/4 here around $41ish
ReplyDeleteShould give you 2pts+