American International Group (AIG), a diversified insurance company is now trading at a price of $59.85 — 15.62% below its average analyst target price of $70.93. AIG outpaced it by 4.7% over the last year with a return of -4.4%, and the stock has an average analyst rating of buy.
American International Group, Inc. offers insurance products for commercial, institutional, and individual customers in North America and internationally. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
American International's trailing 12 month P/E ratio is 3.5, based on its trailing EPS of $16.86. The company has a forward P/E ratio of 9.5 according to its forward EPS of $6.3 — which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the financial services sector has an average P/E ratio of 13.34, and the average for the S&P 500 is 15.97.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
American International's PEG ratio of 1.13 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for American International was $6,279,000,000 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, AIG is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 358.4% and has on average been $2,129,666,666.70.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. American international's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.2, but is still below the average P/B ratio of the Financial Services sector, which stood at 1.95 as of the third quarter of 2022.
Since it has a very low P/E ratio, a lower P/B ratio than its sector average, and an irregular stream of positive cash flows with an upwards trend, American International is likely undervalued at today's prices. The company has poor growth indicators because its weak net margins with a negative growth trend.