Tuesday, April 27, 2010

More on the KBW Downgrade of AIG (and $6.00 price target) AIG

Following up on "AIG Is ‘Grossly Overvalued,’ Lowered to ‘Underperform’ by KBW". The stock is trading down 6.40% at $41.66.
From Notable Calls:
Keefe Bruyette & Woods is downgrading American International Group (NYSE:AIG) to Underperfrom from Market perform with a $6 target.

Rate the Shares Underperform. From a fundamental perspective, KBW views that AIG continues to own some very valuable businesses, however, in its totality, under the current operating and financial structure, they view that the publicly traded shares are grossly overvalued. They would caution investors that due to the highly volatile nature in which the shares trade, a short-term position in the shares, long or short, is highly speculative.

No Real EPS. KBW expects no net real EPS near term. After liquidity needs are met, they expect that earnings generated by the underlying operations are obligated to be used to make Series E dividend payments. While the company may report positive EPS, the firm believes these earnings cannot be valued in the normal sense because these earnings do not accrue to the common shareholder but to the preferred shareholder.

The False Premise of Tangible Book Value
In normal equity analysis, tangible book value is a natural starting point. Tangible book value is viewed to be a measure of the store of value created by a company over time, or an approximation of a run-off value. However, AIG’s capital structure is so unusual that we believe it does not fall under this definition. Would AIG be in business today without government aid? Or consider the CEO's public admission that selling all of the pieces of AIG would not be enough to fully repay AIG's debts. Doesn't this imply negative real worth, despite a positive book value calculation?

They illustrate the difference in capital structure between AIG and a typical insurer above. The typical insurer, P&C or life, carries debt loads at 20-30% debt-to-total capital....MUCH MORE
Notablecalls: As Keefe points out much of AIG's fate hinges on what the Government thinks about the situation and also how well the asset sales will go.

Note that this morning Times Online is reporting that Prudential’s biggest shareholder has been moving behind the scenes to orchestrate a potential break-up of the insurer as a radical alternative to its $35.5 billion Asian AIA acquisition.


This should create additional uncertainty regarding the whole AIG situation and rhymes rather well with the current KBW downgrade.

I think AIG will trade down today, maybe to the tune of 6-7%, putting at least $42 level in play.