Earnings

Dissecting the Numbers for American International Group, Inc. (AIG) and The Travelers Companies, Inc. (TRV)

American International Group, Inc. (NYSE:AIG) shares are down more than -5.07% this year and recently decreased -0.10% or -$0.06 to settle at $62.00. The Travelers Companies, Inc. (NYSE:TRV), on the other hand, is up 8.90% year to date as of 11/13/2017. It currently trades at $133.32 and has returned -0.09% during the past week.

American International Group, Inc. (NYSE:AIG) and The Travelers Companies, Inc. (NYSE:TRV) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, TRV is expected to grow at a -0.32% annual rate. All else equal, AIG’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 20.62% for The Travelers Companies, Inc. (TRV). AIG’s ROI is 0.40% while TRV has a ROI of 11.40%. The interpretation is that TRV’s business generates a higher return on investment than AIG’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, AIG’s free cash flow was 0% while TRV converted 0% of its revenues into cash flow. This means that, for a given level of sales, AIG is able to generate more free cash flow for investors.

Financial Risk

AIG’s debt-to-equity ratio is 0.43 versus a D/E of 0.29 for TRV. AIG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AIG trades at a forward P/E of 12.26, a P/B of 0.78, and a P/S of 1.11, compared to a forward P/E of 13.96, a P/B of 1.54, and a P/S of 1.28 for TRV. AIG is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AIG is currently priced at a -7.09% to its one-year price target of 66.73. Comparatively, TRV is 0.14% relative to its price target of 133.13. This suggests that AIG is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for AIG and 2.70 for TRV, which implies that analysts are more bullish on the outlook for TRV.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AIG has a beta of 1.23 and TRV’s beta is 1.27. AIG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.AIG has a short ratio of 4.06 compared to a short interest of 3.35 for TRV. This implies that the market is currently less bearish on the outlook for TRV.

Summary

American International Group, Inc. (NYSE:AIG) beats The Travelers Companies, Inc. (NYSE:TRV) on a total of 8 of the 14 factors compared between the two stocks. AIG is growing fastly and higher liquidity. In terms of valuation, AIG is the cheaper of the two stocks on an earnings, book value and sales basis, AIG is more undervalued relative to its price target. Finally, BRK-B has better sentiment signals based on short interest.

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