AIG: Government Exit Winner

NEW YORK ( TheStreet) -- American International Group ( AIG) was the big winner financial names on an otherwise weak Wednesday, with shares rising over 5% to close at $32.52, after an enthusiastic upgrade from BernsteinRearch.

The broad indexes pulled back as investors continued to react to the Federal Reserve's release on Tuesday of the minutes of its March 13 Open Market Committee meeting, with little indication of willingness for additional monetary stimulus.

Investors also pushed bank stocks down, after an auction of bonds by the Spanish government totaled $2.6 billion euro ($3.4 billion), which was at the bottom of the planned range.

The KBW Bank Index ( I:BKX) declined 2% to close at 49.00.

AIG's shares have now returned 40% year-to-date, following a 52% decline during 2011.

The shares trade for 11.5 times the consensus 2013 earnings estimate of $2.83, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.66.

BernsteinResearch analyst Josh Stirling on Wednesday upgraded AIG to an "Outperform" rating from "Market Perform," while raising is price target to $45 from $29, saying the shares had "50% upside from here," from the belief that the company "will be able to sell its remaining non-core assets in coming months, anchor further offerings 'at cost' by the Treasury, and perhaps even exit the government in time for a 'victory lap' before this fall's election," to "drive book value, earnings, and eliminate the number one reason "not to own" this discounted name."

Stirling pointed out that with the shares trading for "50% of tangible book value," the stock has appealed to value investors, but added that "the topography has shifted, and with recent clarity on the government exit plan, the stock now offers a compelling catalyst-driven restructuring story, which we expect will outperform most other financials."

The government owns about 70% of AIG's shares, and the analyst said that "if the markets cooperate, AIG should be able to sell their remaining $22b of non-core assets and anchor coordinated public offerings to retire nearly 65% of the Treasury's $36b stake," and with AIG soon able to "be a buyer in size," the government's $29 cost basis is more likely a floor, than a ceiling, as is still more commonly believed."

The government looking to be rid of its AIG stake by November, and "by allowing AIG to buy shares from the government 'at cost', the government's exit will increase AIG's book value by 20-30%, and EPS by 30-50%," according to Sterling, making for a "compelling opportunity" for investors.

Factoring in the government's exit plan, the analyst estimates that AIG will earn $3.38 a share during 2012, followed by 2013EPS of $4.21.

Interested in more on American International Group? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.