Shares of American International Group, Inc. (NYSE: AIG) were down more than 6 percent after CEO Bob Benmosche's "goals" versus "guidance" commentary that was a retraction on the company's plan to achieve a 10 percent plus return on equity (ROE) by 2015.
Benmosche stressed that the goals set in the 2011 re-IPO process--the centerpiece being a 10 percent plus ROE in 2015--were very much aspirational in nature, noting that the company still aspires to achieve them.
Management is unsure whether AIG can reach its aspirational goals by 2015, suggesting these goals may take longer to reach. Goals with time distant deadlines begin to look more like guidance as the deadline approaches, and AIG does not intend to give guidance to the investment community.
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The knee-jerk reaction of investors is that AIG management is now concerned about its ability to meet its goals in a timely manner, and so they are retracting these goals. That's probably the worst-case interpretation of Benmosche's comments, and that is precisely the correct way investors ought to interpret them.
However, the question is whether this is actually problematic?
Investors should note that precise guidance is tough for an insurance company, which deals with events such as natural disasters. Insurance is not a business that operates under strict degrees of accuracy.
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Consensus 2015 EPS forecasts suggest a 2015 ROE range of 7-9 percent without a single analyst believing AIG is capable of achieving a 10%+ ROE in 2015.
" Essentially, AIG management is coming around to a view that investors have already widely shared. Our view has been and continues to be that AIG does not need to achieve a 10% ROE to be an attractive investment. We have and continue to forecast an 8% as attractive enough to buy the stock today," Deutsch! e Bank analyst Joshua Shanker said in a client note.
If AIG management has merely scaled back its guidance to a consensus view, there is some mystery as to why the stock is down over four days of trading. The market at times is subject to irrational dislocations.
It may be the case that there were some investors whose blue sky 2015 scenario has been reined in. However, for most investors, not much has changed.
The company proposed (and perhaps retracted) a lofty and likely unachievable goal of a 10 percent plus ROE in 2015. This involves execution, cost-cutting, capital management and high interest yields.
On the other hand, the company may be able to execute on some of these plans and achieve a stable 8 percent plus ROE instead. If the company is able to show quarterly consistency, implementation of a nominal dividend and deployment of cash into interest bearing investments, the stock can appreciate.
"We believe AIG shareholders will enjoy healthy double-digit appreciation in the stock with a mere 8% ROE in two years," Shanker added.
As the company monetizes assets for the purpose of share repurchase, the book value per share growth can be accelerated. There is additional upside associated with improved operations at its United Guaranty subsidiary, actualization of deferred tax assets and gains in its diminished derivatives portfolio.
In addition, under the leadership of Benmosche, the company has improved the results of all of its key segments. It has lowered its financing costs and spent heavily on infrastructure, which should help underwriting margins going forward.
AIG offers continued earnings growth, with EPS expected to increase at an average rate of 11.33 percent over the next five years. In comparison, the industry and sector growth rates are estimated at 11.09 percent and 10.54 percent, respectively. The S&P 500 is expected to grow 9.78 percent for the same period.
Further, AIG generates excess liquidity that should continue enhance it! s ability! to buyback shares at a discount to tangible book value, likely reducing downside.
Shares of AIG trade 11 times its 2014 consensus earnings estimate, and traded between $30.64 and $53.33 during the past 52-weeks.
As such, investors should take the current weakness in AIG shares as a buying opportunity, as AIG at $47 to $48 represents likely the best risk/reward opportunity.
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