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AIG Could Have 41% Upside: Wells Fargo

Stocks in this article: AIG

NEW YORK (TheStreet) -- Shares of American International Group (AIG) were up 2% in premarket trading Tuesday morning to $32.56, after Wells Fargo analyst John Hall upgraded the shares to "Outperform" from "Market Perform."

Hall increased his 2012 earnings estimate for AIG to $3.38 a share from $2.50, and his 2013 EPS estimate to $3.06 from $2.80. He also increased his valuation range for the shares to $40 to $45, from a range of $27 to $30, "to reflect the likelihood that the company will be independent from the US Government over the course of the next year."

The federal government is looking to sell-off its 70% stake of AIG's shares, and the government also holds a $9 billion stake in Maiden Lane III, which purchased collateral debit obligations from AIG, in 2008, in order to limit the insurer's credit default swap collateral payments.

Hall said "the elimination of these last two government ties will remove a valuation overhang on AIG shares," as Maiden Lane III "should continue to wind down as the securities held within the special purpose vehicle are paid down or liquidated through asset sales," and the government' common equity stake winds down "through a combination of further secondary offerings and potential sales to sovereign investors," and share purchases by AIG

The analyst said that "AIG could repurchase $21.3 billion of its shares financed primarily with the proceeds" from asset sales, including the company's remaining 45% interest in AIA Group. AIG sold a 55% stake in the life insurance unit during March, raising about $6 billion in cash.

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According to Hall, other assets that could be sold or liquidated by AIG to fund repurchases include "the aircraft leasing company ILFC," and AIG's retained interest in Maiden Lane III.

Although AIG "may face near-term challenges associated with non-life insurance reserve adequacy, a shifting non-life insurance business mix, a tough non-life insurance pricing cycle, and a difficult, low interest rate environment," Hall thinks the company's "present low valuation more than compensates for these potential difficulties."

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Wells Fargo's new valuation range for the shares "corresponds to 0.75x of our 2012 proforma book value estimate of about $58.

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