The Best of Kass
Among his posts this past week, Kass explained why AIG's earnings were so disappointing, detailed a short-term Apple trade and interpreted Friday's economic data.
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Originally published on Friday, Nov. 2 at 8:32 a.m. EDT.
There was less than meets the eye in AIG's (AIG) third-quarter 2012 earnings report issued after the close on Thursday.
While the headline earnings of $1.00 a share beat consensus EPS of 86 cents, all of the beat and then some was notably a function of a greater-than-expected contribution from noncore items in global capital markets ($200 million better than estimated), direct investment book ($400 million higher than estimates), the fair value mark of AIA ($200 million above analysts' forecasts) and ML III ($150 million higher than consensus).
In total, other noncore operations (at $1.47 billion) produced nearly $1 billion pretax more than consensus contribution. These noncore items contributed close to a 40 cents-a-share swing relative to expectations, placing core earnings at a disappointing level against consensus and the headline number.
Property and casualty investment income beat. So did SunAmerica Financial as did domestic life profits. Aircraft leasing was hurt by an impairment charge.
The lower core earnings power (property and casualty missed by nearly $300 million as the combined ratio rose to 105% vs. 100.5% estimated) demonstrated in this report explains in large measure why AIG sells at a massive discount to book value ($68.80). A company that can only demonstrate a 6% sustainable return on capital deserves a meaningful discount to book value.
This disappointing profit shortfall combined with a likely Treasury sale of its remaining shares by year-end -- the lockup ends on Nov. 10 -- suggests to me that AIG's shares will remain under pressure. As well, the price of the secondary will likely come at a lower level than I previously thought.
I have sold most of my AIG long position.
And if the Street waxes optimistically this morning -- I have yet seen the reviews -- I will sell the balance of my AIG (no rush!) and wait (depending on price) for the secondary to reenter the name.
I continue to expect that the AIG secondary will come in November/early December, but previously I thought it would come between $34-$35 and then the shares would not look back. Now I think it might come $32-$33 and the sale and near-term outlook will be more of a struggle.