Please ensure Javascript is enabled for purposes of website accessibility

AIG Stock Upgraded: What You Need to Know

By Rich Smith - May 16, 2017 at 12:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wall Street Journal outlines three big reasons to love AIG's new CEO.

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 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.

CEO's photo.

New AIG CEO Brian Duperreault. Image source: AIG.

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.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

American International Group, Inc. Stock Quote
American International Group, Inc.
$56.45 (-1.47%) $0.84
Marsh & McLennan Companies, Inc. Stock Quote
Marsh & McLennan Companies, Inc.
$173.08 (0.09%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.