Battered AIG (AIG) Upgraded to BUY, 35% Upside

Citi calls a bottom to AIG’s recent death spiral and upgrades to Buy. Why? It’s cheap and investors now expect the worst. Even with a “kitchen sink” quarter in which AIG disclosed a heavy loss and yet another capital raise, the stock would rise:

While our estimates are already the low on the Street, we have also analysed an extreme scenario – heavy losses and large capital raise – where we still see single-digit upside. In our extreme case, we assume another $20 billion of CDS and investment losses (compared with CDS “mark ups” in 2Q08 for our run-rate model). Also, while AIG may have enough cash to support its current liquidity needs, the extreme case explores a $15 billion equity raise and suggests the current stock price can suffer such dilution.

Citi didn’t miss a chance to throw a little dirt in the face of incoming CEO Bob Wilumstad:

We do not see Bob Willumstad as a “change” figure as he represents the strategy that AIG pursued over the past nine months of heavy loss activity. However, we believe his mandate – merely stop the bleeding – has very low bar to cross to be viewed as successful.

Citi also bumped up its target price slightly, from $41 to $42.

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