AIG - New Value Line Report Out - May 25

I am not sure if I have ever discussed AIG previously on the site, although I have discussed it previously with friends and it is a major holding in an investment club I am a member in. Basically I am optimistic that this stock could be a double for investors over the coming years. During the scandals which hit a few years back involving the former CEO (Greenberg) the stock price was decimated and the stock lost the premium PE multiple that it had enjoyed for many years (15-30 range). Since then the stock has stabilized under new leadership and the business has been reporting good operating results.

The interesting thing is that the stock trades with a PE in the 10 area. (Projected FY2007 earnings are in the $7 per share range and current stock price is around $72 per share). The stock has ranged between 60 and 70 over the past year. I am not typically a big fan of using the PE multiple alone as we have discussed somewhat regarding the mortgage lenders (WAMU and Countrywide) and the funny money accounting that they are currently following. Still AIG was forced to get its act together after the scandals hit and they had a lot of regulatory scrutiny on them forcing the corrections.

I guess that with the solid earnings growth they are experiencing, I find it very unlikely that the PE will go significantly below 10 - I see it as a reasonable floor on valuation for arguably the #1 insurance company in the world (while.....maybe #2 - berkshire hathaway isn't all bad either.....) Anyways - the point of the value line article which may be too optimistic is that if 10 is a reasonable floor for the PE - what if PE can move close to the historical 15 - 20 range. This multiple expansion could drive significant share price growth. The company's valuation is huge as is - around $190 billion - so a double in share price would put it in near Microsoft and GE in company size. So this is absolutely NOT a ten bagger. That said I think a double to triple is possible, especilly if the current bullish / bubblish sentiment in the market keeps hold.

I am not optimistic with much of the rest of the financial sector (re: mortgage lenders, brokers, banks) - so it is possible that the AIG valuation remains depressed as it is lumped in with the aforementioned sub-sectors that have a lot more exposure to the housing market and mortgage market than they are letting on.

Here is the link to the Valueline report: Click here

Best regards,

Ben