There are a few companies in the world that are so big that they might actually be too big. Pfizer (NYSE:PFE) is one, and insurance and financial services firm AIG (NYSE:AIG) is another.
Looking back, it would be very difficult to be too negative about AIG. Just about every measure, like price/earnings and revenue growth, compares very well with the insurance sector. AIG's price-to-sales ratio at 2.2 is very high, but the trade-off is 17% operating margins that blow away the competition.
The point of any stock analysis should be to look forward, though. What might go wrong, or what might go well, for a company?
First for AIG, there are succession issues. CEO Maurice Greenberg is 78 years old. His management has been truly visionary. It's possible that the next CEO will have to be even more of a visionary to allow the stock to enjoy continued excellent returns.
A more important question is where will future growth come from? AIG recently started a new series of TV commercials. In one of them, it mentions that it has 50 million customers. That sounds like a lot, but how many more can it add? There are fewer than 300 million people in the United States.
In addition to insurance services, it has a relatively small, but growing, asset management division. I have had a couple of short stints at sell-side brokerage firms, and one thing that was made clear was that clients with investable assets of less than $100,000 were not desirable. New clients with $2,000 or $3,000 probably don't need variable annuities or separate account management.
AIG is counting on international growth, and as it rolls out its insurance and financial services in foreign countries, it runs the risk of marketing to small, unprofitable clients. How many profitable clients are there in China? According to its website, AIG has a presence in 97 countries. How many profitable clients are there in Zimbabwe or Estonia?
Over the last decade, AIG has outperformed the Standard & Poor's 500 by 250%, and over the last five years, it has grown earnings by an average of 12.9%. AIG could very well overcome this size obstacle and continue to enjoy similar growth into the future. Keep in mind, though, that being too big is a risk for shareholders. To buy the stock is to bet that management's strategy can deal with the issue in a way that benefits shareholders.
It is not clear to me how AIG's best days could be still be ahead.
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Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, he owned none of the stocks mentioned, nor does he own AIG on behalf of clients. However, one client owns AIG outside of the assets managed by Roger.
