Monday, May 8, 2017

A current AIM Fund holding: Assured Guaranty (AGO) by Adam Hamilton “Rest assured - this is a guaranteed winner"

Assured Guaranty (AGO, $38.79): “I assure you, Assured Guaranty is a guaranteed winner.”
By: Adam Hamilton, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Assured Guaranty (NYSE:AGO) provides financial guaranty insurance products to provide credit protection to debt holders from defaulting.

• This year, AGO posted the highest annual amount of present value business production (PVP) since 2011

• In the U.S. municipal bond insurance market, AGO provided more transactions and par insurance than the rest of the industry combined.

• A new focus strategy of acquiring legacy bond portfolios made tremendous progress this year. AGO acquired CIFG NA in July 2016 and MBIA UK in January 2017

• In FY16, AGO produced a 46% annual return which exceeded the S&P 500 Financials index of 23%. Its share price surpassed $40 this year for the first time in company history.

Key points: Present value business production equated to $214 million at the end of FY16, the highest in 5 years and up 20% from FY15. This is due to significant contributions from each of AGO’s core business. U.S. Public finance contributed $27 million of PVP with international transactions. Structured finance contributed $28 million of PVP, provided by the company’s first ever balloon note guaranty.

AGO made big moves this year, focusing on large transactions. The public-private partnership (PPP) deal to help finance the redevelopment of New York’s LaGuardia Airport was a milestone. This is the biggest PPP in the history of the Port Authority of New York and New Jersey. In this PPP, AGO guaranteed $412 million of par in the primary market and $180 million in the secondary market. This is huge, considering President Trumps call of large-scale spending on infrastructure development.

In terms of inorganic growth, AGO continues to make long strides. The acquisition of CIFG NA $320 million in operating income. According to management, these acquisitions are expected to grow earnings and book value per share in 2017. This solidifies AGO’s plan to finance international infrastructure as well as domestic is in full effect.

What has the stock done lately?
Over the past 6 months, AGO’s stock has had a price range between $29-$43. The stock was on an upward trend but saw a slight dip three months ago. However, since releasing earnings, AGO has seen upward movement as price continues to rise. The stock’s intrinsic value continues to grow and if AGO continues on this path, it should continue to be on an upswing over the next year.

Past Year Performance: AGO has executed its business strategies to their true potential. The company was the only monoline this past year to maintain an active presence in its three core areas of international infrastructure finance, structured finance, and U.S. public finance. They continue to manage their capital efficiently particularly using it to make acquisitions. They continue to increase shareholder value, with an 8% increase in quarterly dividend, and 40% YOY growth in annual operating income per share. The company’s strategies are geared to perform and produce financial strength in the long term.

Source: FactSet

My Takeaway
AGO was pitched in 2012 with a price target of $20.00 and 38% upside. The stock is now currently trading at $38.85 and its outlook shows numerous room for improvement. As interest rates rise, the demand for municipal bond insurance will increase as well, which will drive AGO’s growth. Subsequently, I recommend that the AIM international portfolio hold on to Assured Guaranty as of May 2017.

Source: FactSet

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