AIG (AIG) shares are down 10% today, after Barron’s delivered one of its classic weekend beat-downs.
Yet while AIG shareholders should be worried about many things, Barron’s latest criticism shouldn’t be one of them.
The magazine’s main criticism is that AIG shares have negative tangible book value, which is essentially book value (based on recent accounting statements), after stripping out TARP and goodwill.
Barron’s: By our maths, however, the company has negative tangible common shareholder equity, in contrast with the positive figures for nearly all major life and property-casualty insurers.
They proceed to give their maths, only to pummel our poor strawman into the ground.
But come on, this criticism is to completely miss the point on AIG.
This is because firstly, companies can have negative tangible book value yet still command market value. There can be value beyond book value. And secondly, and much more importantly, nobody really knows what AIG’s book value will be once all is said and done. Not even management.
So to make a book value argument against AIG shares right now is about as relevant as saying AIG looks cheap on forward PE.
The biggest problem facing AIG right now is uncertainty regarding what the actual ex-post values of its assets and liabilities will be in the future, and then once that is known, what residual value will be left over for shareholders.
Current accounting numbers are really just place holders until see how AIG’s drama unfolds. While yes accounting always involves some degree of estimation, in AIG’s case the current balance sheet is nothing more than a guesstimate with massive room for error.
So while the shares could feasibly go to zero, and we don’t claim to make a fundamental argument for AIG here, we wouldn’t worry too much about an apparent negative book value as per Barron’s.
Disclosure: The author owns shares in AIG.