Assured Guaranty (NYSE:AGO): Colour on recent sell-off

Couple of firms are out with defensive comments on Assured Guaranty (NYSE:AGO), the financial insurance guarantee provider.

The company has seen its stock price fall off the cliff over the past weeks, down to $14 level from $24 in April. Last night AGO has announced today that the company repurchased 707,350 shares at $14.74 per share.

- Piper Jaffray notes that in their view, the announcement by Assured Guaranty regarding the completion of its share repurchase authorization offers a glimpse into the future performance of AGO in the quarters ahead. More specifically, they continue to believe the credit portfolio remains well managed and, as credit performance continues to improve, will result in an excess capital position, leading to positive revisions to the firm's ratings and outlook along with multiple expansion on the shares. Piper reiterates their Overweight rating.

For some time, management withheld from acquiring shares due to its concern around the potential impact on its capital position and ratings. While on the surface the announcement does not offer a meaningful change with regard to the financials, the bigger picture offers a glimpse into management's confidence of where Assured Guaranty stands in the quarters ahead. In Piper's view, investors can anticipate management continuing to manage capital toward rating upgrades, portfolio acquisitions and perhaps further share repurchase. Regardless, they believe management's actions speak volumes toward the future performance of Assured Guaranty and its shares.

Expect the continued run-off of RMBS and focus on municipal underwriting to result in the financial guarantor showing an increasingly stronger capital position. Considering the continued improvement in delinquency trends, the run-off in RMBS by the end of 2011 and that rating agency models view municipal underwritings as being capital accretive, Piper finds it difficult to imagine AGO ratings and outlook won't move up from here.

Continue to view shares undervalued, reiterate Overweight. Currently, AGO shares trade at just 0.75x current book value and nearly 0.50x year end 2011 book value. With momentum gathering on credit and ratings, the firm believes shares are poised to experience multiple expansion from these levels. Beyond expected GAAP book value of $23.45 twelve months out, they forecast an adjusted book value to reach roughly $57 by year end 2011.


- J.P. Morgan notes this repurchase completes the 2M share buyback program authorized by AGO’s board in November 2007. The size of the buyback is relatively insignificant, and the share count does not change enough to materially impact our EPS estimates. However, the fact that management used up its entire remaining buyback authorization in such a short period makes this a notable event, signaling mgmt’s frustration over the recent sell-off.

Expect further share repurchase authorization. With the latest repurchase activity, AGO has used up its remaining buyback authorization. Given the strong capital position that AGO is in currently, J.P. Morgan expects further repurchase authorization to be granted by the board in the near future in order to give AGO the ability to take advantage of market opportunities and provide a deterrent to short sellers.

The firm reiterates Overweight rating and $40 price target.

Notablecalls: I think AGO is one the financial stocks one should keep on radar for a potential bounce:

- The stock has gotten whacked because of sovereign debt losses out of Europe, but the company has no direct exposure to sovereign risks.

- They do have a lot of U.S. municipal bond exposure but they have not insured any of the Florida "dirt" bonds.

The thing with U.S. municipal exposure is that even if some municipalities default the likelyhood of of a full-blown bankruptcy is very low. They can always raise taxes and sell some assets. Meanwhile, AGO would be on hook to cover the interest payments but they would eventually get their money back from the municipalities.

I spoke to a pretty well known Assured Guaranty (NYSE:AGO) bull this morning and this is what he had to say:

'... Ok, I went back and analyzed every muni bankruptcy ever and looked at the outcome for bondholders and then went through AGO's MBS stuff and looked at their exposure - basically, it's a $40 stock. In 2011 I think it earns $7/share...'

So there you have it. Not making a trading call here but I think AGO is worth keeping on the radar.

Oh and btw, here's his market prediction: "...My prediction for today: we bottom at 10am and then go up for next 3 months. Like 9/21/01..."