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NEW YORK (
Ambac Financial(AMBC - Get Report) surged Friday after BTIG analyst Mark Palmer initiated coverage of the recently-reorganized monoline bond insurer with a "buy" rating and a $31 price target.
Palmer appears to be the only analyst covering Ambac at this point, though his thesis on the insurer looks fairly similar to his long-held views on
MBIA(MBI - Get Report) and
Assured Guaranty(AGO - Get Report), which have proved to be very good calls, even if they took longer than expected are still well short of Palmer's aggressive target prices.
Ambac soared 10% to close at $26.03.
Palmer initiated coverage of MBIA at $8.50 Nov. 30, 2011 with a 12-month target price of $22.50. The thesis was largely based on the idea that MBIA would settle litigation with
Bank of America(BAC - Get Report), granting it a $2-3 billion payout and removing a legal challenge to a critical restructuring for the bond insurer. More than 17 months later,
Bank of America settled for $1.6 billion, while getting warrants to buy up to 4.9% of the insurer at a substantial discount. MBIA shares popped as Palmer anticipated, but never made it much past $16. They were up 0.34% to $15.34 late Friday morning.
Assured Guaranty, meanwhile, was at $11.25 when Palmer initiated coverage with a $35 target price Dec. 5, 2011. Palmer also counted on the insurer extracting legal settlements from the banks and its "virtually unimpeded opportunity to increase its penetration," of the municipal bond insurance market. While the extended period of low interest rates has made the economics of the muni bond insurance business unattractive, Assured Guaranty proved adept at winning big settlements from the banks. Shares have more than doubled since Palmer's initial recommendation and were trading at $23.94 shortly after noon on Friday.
In the case of Ambac, Palmer's recommendation is once again based in large part on the prospect of it winning legal claims over mortgage backed securities sold by the big banks. Ambac, which came out of bankruptcy May 1, has paid out roughly $2.5 billion to banks including Bank of America,
First Franklin. Palmer believes legal battles won by MBIA and Assured Guaranty have laid the groundwork for Ambac to extract some relatively easy settlements. Even if it can win just half of what it has paid out, $1.258 billion would exceed its current market cap, he points out.