Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Insurer American International Group (AIG -1.47%) has a new CEO -- and Morgan Stanley loves him. That's the news this week in a nutshell, after AIG announced on Monday that it has convinced Brian Duperreault to resign his position as CEO of Hamilton Insurance Group and return to the AIG fold as CEO of the company he left in 1994.
No sooner had the news broke than investment banker Morgan Stanley declared Duperreault a "credible" CEO, and upgraded AIG stock to overweight, assigning a price target of $72 to the stock (which currently costs $62 -- making for a 16% potential profit). As related in a write-up on StreetInsider.com this morning, Morgan Stanley sees the potential for "sustainable and profitable growth initiatives" creating what the analyst calls a "compelling risk-reward" situation at AIG.
Here are three reasons why.
1. Introducing the new CEO
AIG's new CEO was big news on Wall Street, and The Wall Street Journal wasted no time digging into his life story to explain why Morgan Stanley (and others) might find Duperreault attractive as a CEO. First and foremost -- he's no newcomer to AIG, or to the insurance business.
Rather, as WSJ explains, Duperreault (age 70) spent 21 years working for AIG in a variety of roles before departing the company in 1994 to embark upon a career as a turnaround specialist for troubled insurers. In his time away from AIG, Duperreault:
- Transformed one-time ACE Ltd. (his first stop after leaving AIG) into a major force in the insurance world. In 1994, when Duperreault joined ACE, the company was doing barely half a billion dollars in annual business. But by 2016 (10 years after Duperreault had left the company, admittedly), ACE was so big that it was able to swallow AIG rival Chubb (NYSE: CB) (the combined companies now operate under Chubb's name). Today, that combined company does $14.1 billion in annual business.
- Spent five years as first CFO, and then CEO, of insurer Marsh & McLennan (MMC 0.09%). During that time period, data from S&P Global Market Intelligence show that Duperreault took Marsh & McLennan from $10.7 billion in annual revenue to $12.3 billion (14% growth), and turned the company from a $73 million money loser in 2008 into a firm earning $1.4 billion in annual profit by the time he left in 2013.
- Ultimately, Duperreault ended up founding his own insurance company, Bermuda-based Hamilton Insurance Group Ltd, in 2013. It's from there that he's moving back to take the helm at AIG.
2. Icahn signs off
Duperreault arguably owes his new job to pressure put on AIG by activist investor Carl Icahn, who has been agitating for new management to join the company and move to split it up and sell the parts to unlock value for shareholders. And yet, Duperreault is showing an independent streak from day one. Immediately upon being named CEO, Duperreault declared he "didn't come here to break the company up," but rather "to grow it."
Despite this statement, Icahn has expressed his faith that Duperreault is the right man for the CEO's job, tweeting: "Very pleased the $AIG board is finally making some of the much-needed changes we've been advocating the last 18 months."
3. Winning endorsement from a legend
At the same time, Duperreault won a big vote of support from his one-time boss, legendary AIG ex-CEO Hank Greenberg. Upon hearing of the hire, Greenberg averred that Duperreault's 21-year history at AIG, prior to his exploits outside the company, provided "a great foundation" of experience, and declared his confidence that Duperreault has the experience necessary "to make changes to improve [AIG's] results."
The most important thing: Is the price right?
Icahn, Greenberg, Morgan Stanley -- a lot of people have expressed a lot of faith in Duperreault's ability to right the ship at AIG. But will they be proven right? I have to say that it only takes one look at AIG's financials to see that while Duperreault has a heap of work to get done, there could be considerable upside if he succeeds.
Down 7% since the year began, AIG stock is coming off a money-losing year that saw GAAP profits plunge from $2.2 billion in 2015 to negative $849 million in 2016. Operating cash flow at the company was negative $7 billion last year, as a policy of selling insurance policies at too-cheap premiums came home to roost and saddled the company with losses.
And yet, as recently as 2013, AIG was a company earning $9 billion a year. If Duperreault can get profits like those rolling in again, then at today's market capitalization of $57.2 billion, AIG stock would be selling for a P/E ratio of only 6.4 -- instead of the 110-times-earnings valuation that AIG stock sports based on trailing-12-month results.
That prospect alone could be a great reason to follow Morgan Stanley's lead, believe the endorsements from Duperreault's colleagues, and buy AIG stock.