American: An Asian Connection
08/13/2004 12:00 am EST
According to Gary Alexander, the key to long-term success for American International Group is the "international" part of its name—particularly Asia. Here, the editor of the always-excellent SmartMoney Investor Insights offers his look at this global powerhouse.
"American International Group (AIG NYSE) is an earnings growth machine. Earnings per share are expected to rise 18% this year, from $3.89 in 2003 to an estimated $4.53 in 2004, and up another 64 cents to $5.17 in 2005. AIG is big, but it is one of the cheapest mega-cap stocks you can buy. AIG started with one man’s dream. It began in 1919 as a marine insurer in Shanghai. An American entrepreneur named Cornelius Vander Starr thought that Asia needed more ship insurance. Today, AIG insures everything from Internet identity theft to hijacking, but their Asian connection is the secret to AIG’s success.
"American International has long specialized in entering dangerous new territories to establish a beachhead. AIG has been thrown out of China twice—by the Japanese in the late 1930s, and by Mao’s reformers in the 1950s—but they are right back in China once again. Right after WWII, AIG entered war-torn Germany and most of ravaged Europe, plus the Philippines, and Southeast Asia. In 1979, before Solidarity started to liberate Poland, AIG had already moved into Poland, Hungary, and Romania. In the 1990s, AIG was the first insurer to enter Hanoi (Vietnam) and later into Russia.Since AIG went public in 1969, it has grown from a micro-market-cap of $0.3 billion to nearly $200 billion, maintaining an annual growth rate of 22%, not counting dividends. Earnings have grown at a 19% annual rate.
"Meanwhile, even if you don’t care for the outsourcing of jobs to India and China—the world’s two largest nations by far—the growing economies there will help AIG, which is opening new markets there.Due to regulatory barriers and traditional customs, other Western insurers trail AIG in penetrating China, India, and the rest of Asia—where 60% of humanity lives and is finally becoming prosperous. I expect some China-based stocks to tumble soon, but not AIG, due to its global diversification in 130 countries. The stock has risen nicely since we added it to our Core stock list in January, but it still has a long way to go. The stock trades at just 18 to 19 times trailing earnings, well below their five-year average of 27 times trailing earnings. Buy AIG up to $75. This is a huge stock that won’t double for us in one year, but it should do it for us within three-five years. I would forecast $90 in six months and $150 in 2008 for this stock."
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