Instead of posting a whole series of short posts on the recent results of companies I've discussed on the blog, I thought I'd start summarizing and grouping my thoughts together.
American International Group
AIG posted first quarter results that the market absolutely loved, driving the stock price up considerably for a mega-cap name. The big headline is AIG's combined ratio dropped below 100 for the quarter, meaning they're making an underwriting profit and not just relying on investment returns to drive profitability, which often leads to riskier investments. This is significant because since 2005, AIG's P&C business has produced positive underwriting income in only two years (insurance expense has exceed premiums by about 4%). AIG's Life and Retirement business also posted improved results, mainly as a result of the stock market performance in the first quarter driving up assets. The improved housing market has also lifted their United Guaranty Corporation business, but with it being such a small piece of AIG, does it make sense to sell this unit or spin it off given the recent love for names like Radian? I'm probably not smart enough to answer that question.
AIG's thesis is still intact, ROE is inching towards 10% and the book value is about $60 per share, the market price should keep grinding higher closer to book with the help of their debt reduction, stock repurchases, and the initiation of a dividend.
CEO Bob Benmosche appeared yesterday on CNBC to discuss their results, a few awkward Mario Rubio like water bottle moments aside it was a good interview.
Tropicana posted relatively weak first quarter results citing continued negative impact from Hurricane Sandy at the Atlantic City property, company wide revenue was down over 8% compared to the same quarter in 2012, but net income was up as a result of their debt refinancing. We know that gambling spending is down nationwide, but when will Hurricane Sandy no longer be a valid excuse and its instead its really just Atlantic City in terminal decline? Tropicana also disclosed that in January they settled real estate tax appeals with Atlantic City. Tropicana will receive $49.5 million in the form of future tax credits ending in 2017, a pretty significant number given AC revenues that should drop straight to the bottom line (the $49.5 million is front weighted towards 2013/2014).
Tropicana also announced an agreement to sell the River Palms hotel and casino for $7.0 million, with the closing happening in the third quarter. $7.0 million sounds cheap to me for a 58,000 square foot casino, a hotel, and 35 acres of land, but Tropicana has been hinting at problems with the Laughlin market in the past and in particular with the River Palms operation, so it shouldn't have been a big surprise.
Overall, the thesis here hasn't changed, Tropicana's true value is being hidden by its low float and net cash position which should be used to either acquire or build new casinos. Icahn Enterprises (IEP) has begun providing an Indicative Net Asset Value Calculation on their quarterly press releases; IEP raised its valuation metric from 8x EBITDA to 9x EBITDA, valuing its 67.9% stake at $551 million, making the entire company worth $811 million, or roughly $30 per share versus the $15.75 its trading at today. But given its lack of liquidity, not a name for everyone.
No real surprises with Ultra Petroleum's results either, production dropped as they reduced capex throughout 2012 while waiting for gas prices to respond to a more normalized supply/demand environment, which is finally happening with prices now above $4. The increase in gas prices have brought the PV-10 value of their reserves back up to $5.25 billion, but due to accounting rules, Ultra won't be able to reverse the write-downs on their balance sheet, but the assets are still there and quite valuable due to Ultra's low operating costs (cash flow margin @ 55%, net income margin @ 26%).
On the conference call there was more talk this quarter of looking to acquire an asset that would be a "third leg of the stool" to their Pinedale and Marcellus assets. Ultra would use their free cash flow from 2013 and 2014, plus some additional debt to make the purchase, and they'd be agnostic to the commodity involved. I'm a little torn on an acquisition, I think the market would like Ultra to make a more liquid rich purchase, but my thesis is based on Ultra being a pure play on natural gas and natural gas prices reverting to the mean. Additionally, if Ultra's Pinedale field returns 40-60% IRR at $4 gas prices, why not focus on this property and return cash to shareholders by paying down debt? Management has said they are a return focused, not a growth for growth's sake company, so hopefully any acquisition would have a high hurdle rate.
Disclosure: I own shares of AIG, TPCA, and UPL