Dear Bruce: When Will the AIG Music End?
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American International Group, Inc. (NYSE: AIG) is having a rare down day, but the one thing that could pull the stock apart is likely not happening... not yet... and maybe never.
If you didn't already know, a gentlemen by the name of Bruce Berkowitz of Fairholme Capital Management is the ax in AIG's stock. He has been buying the stock aggressively at least since March, and now controls 32 percent of the float.
Berkowitz has a near double in the stock, as his cost basis is likely in the mid-$30 range.
Controlling 32 percent of the float has allowed Berkowitz to have his way with the stock and likely helped contribute to the 40 percent run-up this month alone.
With one person controlling so much stock, a supply and demand imbalance has created a bidding war between momentum buyers and covering short seller for the remaining 68% of the float. The more upside that is seen, the more momentum buying. The more momentum buying, the more short squeezing, and so on and so forth.
Let's be honest, Berkowitz has played shorts like a fiddle so far. But will the music end?
Sometime in the first quarter, Berkowitz will no longer be the ax in the stock. That role will be taken over, at least temporarily, by the U.S. government.
AIG will soon exchange the government's preferred shares for common shares. Once this occurs, the U.S. Treasury will be give 1,655,037,962 AIG common shares.
Total AIG shares outstanding will swell from 140,029,102 currently to 1,870,067,064.
Berkowitz, who currently owns 44,294,324 AIG shares, or 31.6% of the current shares outstanding, will see his percentage stake shrink once the conversion takes place.
Berkowitz and other current AIG shareholders will receive 75,000,000 warrants with the conversion plan. So for every share held, warrants for another 0.54 shares will be distributed. With the warrants, Berkowitz share stake will move to about 68.2 million, or about 3.6% of the new total shares outstanding.
Berkowitz may continue to buy shares, and may even buy some of the government's stake, but his fund is not large enough to take down the nearly $100 billion in stock coming to the market from the Treasury.
The point is that once this all happens, Berkowitz will no longer be the lone person controlling the stock. The government shares will be sold to hundreds if not thousand of different investors, each making day to day decision on if they should hold, buy, or sell AIG. Sooner or later, AIG will start acting like a normal stock with normal valuations.
While it can be argued that AIG is a cleaned-up company with great assets, including shares in MetLife and AIA, under most metrics the stock price appears overvalued.
Looking at the numbers, it is hard to justify the current share price. Some analysts see AIG earning $1.5-$2.5 billion in 2011. This means the company will earn $0.80 to $1.34 per share in 2011. Rival Travelers (NYSE: TRV) trades at less than 11x 2011 EPS. Applying this multiple to AIG would suggest a price of $8.80-$14.74. Even if you give AIG a massive premium of 20x EPS, this would suggest a price of $17.60-$29.48.
So with Mr. Berkowitz losing control of the stock soon and valuation at questionable levels, will he start selling soon or will he stick it out and risk his profits in AIG? We have a funny feeling that pretty soon the market will tell the story. We will be watching.
If you didn't already know, a gentlemen by the name of Bruce Berkowitz of Fairholme Capital Management is the ax in AIG's stock. He has been buying the stock aggressively at least since March, and now controls 32 percent of the float.
Berkowitz has a near double in the stock, as his cost basis is likely in the mid-$30 range.
Controlling 32 percent of the float has allowed Berkowitz to have his way with the stock and likely helped contribute to the 40 percent run-up this month alone.
With one person controlling so much stock, a supply and demand imbalance has created a bidding war between momentum buyers and covering short seller for the remaining 68% of the float. The more upside that is seen, the more momentum buying. The more momentum buying, the more short squeezing, and so on and so forth.
Let's be honest, Berkowitz has played shorts like a fiddle so far. But will the music end?
Sometime in the first quarter, Berkowitz will no longer be the ax in the stock. That role will be taken over, at least temporarily, by the U.S. government.
AIG will soon exchange the government's preferred shares for common shares. Once this occurs, the U.S. Treasury will be give 1,655,037,962 AIG common shares.
Total AIG shares outstanding will swell from 140,029,102 currently to 1,870,067,064.
Berkowitz, who currently owns 44,294,324 AIG shares, or 31.6% of the current shares outstanding, will see his percentage stake shrink once the conversion takes place.
Berkowitz and other current AIG shareholders will receive 75,000,000 warrants with the conversion plan. So for every share held, warrants for another 0.54 shares will be distributed. With the warrants, Berkowitz share stake will move to about 68.2 million, or about 3.6% of the new total shares outstanding.
Berkowitz may continue to buy shares, and may even buy some of the government's stake, but his fund is not large enough to take down the nearly $100 billion in stock coming to the market from the Treasury.
The point is that once this all happens, Berkowitz will no longer be the lone person controlling the stock. The government shares will be sold to hundreds if not thousand of different investors, each making day to day decision on if they should hold, buy, or sell AIG. Sooner or later, AIG will start acting like a normal stock with normal valuations.
While it can be argued that AIG is a cleaned-up company with great assets, including shares in MetLife and AIA, under most metrics the stock price appears overvalued.
Looking at the numbers, it is hard to justify the current share price. Some analysts see AIG earning $1.5-$2.5 billion in 2011. This means the company will earn $0.80 to $1.34 per share in 2011. Rival Travelers (NYSE: TRV) trades at less than 11x 2011 EPS. Applying this multiple to AIG would suggest a price of $8.80-$14.74. Even if you give AIG a massive premium of 20x EPS, this would suggest a price of $17.60-$29.48.
So with Mr. Berkowitz losing control of the stock soon and valuation at questionable levels, will he start selling soon or will he stick it out and risk his profits in AIG? We have a funny feeling that pretty soon the market will tell the story. We will be watching.
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