Sep 24, 2020
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American International Group Stock Has A 30% Upside

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BRAZIL – 2019/05/21: In this photo illustration the American International Group (AIG) logo is seen. [+] LIGHTROCKET VIA GETTY IMAGES American International Group stock (NYSE: AIG) lost more than 63% – dropping from $52 at the end of 2019 to around $19 in late March – then spiked 50% to around $29 now. Despite the hot rally the stock remains 44% below its level before everything of the year

 

There were 2 reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plummeted. As the company is heavily dependent on insurance premiums and income from investment of these premiums this can harm its top line through lower premiums and expected drop in investment yields

 

However the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment which is also evident from the stock recovery after that point. But this isn t the end of the tale for American International Group s stock Trefis estimates American International Group s valuation to be around $37 per share – about 30% above the present market price – according to an upcoming trigger explained below and one risk factor

 

The trigger is a better trajectory for American International Group s revenues over the second one 1/2 the year. We think the company to report $44. 8 billion in revenues for 2020 – around 10% less than the figure for 2019. Our forecast stems from our belief that the economy is likely to improve in Q3

 

This is also substantiated from the recently released consumer spending data in the U. S which implies an m-o-m growth of 8. 5% in May followed by 5. 6% m-o-m in June. If the rage continues in the coming months it’s likely to improve the net premium figure which was expected to suffer as customers and businesses were more focused at the short term

 

Further income from investment of insurance premiums – which is very critical for its profitability – has improved through the hot improvement in the securities market. This in turn would get advantages the revenue trajectory over the arriving months. The net income for the year is expected to drop to $2. 3 billion – down 31% y-o-y reducing the EPS figure to $2

 

69 for FY2020. Thereafter American International Group s revenues are expected to marginally decline to $44. 2 billion in FY2021 mainly driven by a slight drop in the life and retirement segment. Further the net income margin is likely to improve to the FY 2019 level leading to an EPS of $3

 

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VT Engage Rally The Youth Vote On Campus Finally how much should the market pay per dollar of American International Group s earnings? Well to earn nearly $3

 

53 per year from a bank you d must deposit around $390 in a savings account today so about 110x the desired earnings. At American International Group s current share price of approximately $30 we are talking about a P/E multiple of just below 9x. And we think a figure towards 11x would be appropriate

 

That said insurance is a risky business right now. Growth looks less promising and near-term prospects are less than rosy. What s behind that? American International Group is an insurance giant with around $390 billion in identifiable assets between its life & retirement and group insurance segments (as per FY 2019 data). The company drives around 25% of its total revenues from income generated by the investment of insurance premiums

 

Hence its business model is very sensitive toward changes in investment yields. While the S&P 500 index is on a growth trajectory (up 55%) because the March bottom from now on destabilization in the economic condition or an unexpected jump in the Covid-19 case count can reverse the momentum and could negatively impact AIG s top line

 

A similar trend is visible across American International Group s peer – Prudential Financial. Its revenues also are likely to suffer in FY2020 through lower premiums and a drop in investment income. This will explain why Prudential Financial stock currently has a stock price of over $69 but looks slated for an EPS of around $10

 

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