Successful Lehman Brothers Litigation To Yield $103 Million Gain In 2025

Key Takeaways

• Geographic expansion and consolidation efforts are positioned to boost revenue, profitability, and market presence across multiple regions.
  
• Strategic buybacks and litigation gains set to improve 2025 earnings and shareholder value.
  
• Interest rate fluctuations and exposure to troubled credits could increase volatility and impact Assured Guaranty's financial performance, net margins, and earnings.

Catalysts

Provides credit protection products to public finance, infrastructure, and structured finance markets in the United States and internationally.

• Assured Guaranty has expanded its geographic reach by opening offices in Australia and Singapore, and pursuing opportunities in the U.S., U.K., Australia, New Zealand, Continental Europe, and Asia, which could boost future revenue growth as they tap into new markets.
  
• The consolidation of their insurance subsidiaries into Assured Guaranty Inc. is expected to create a more efficient capital structure, leading to higher profitability and improved net margins due to the increased diversification and larger capital base.
  
• They have solid pipelines in their financial guarantee businesses and record production figures in 2024, setting the stage for continued growth in revenue and new business generation in 2025 and beyond.
  
• Successful resolution of litigation with Lehman Brothers International Europe, anticipated to yield a pretax gain of approximately $103 million, will positively impact earnings in the first quarter of 2025.
  
• The company's buyback strategy, which was significant in 2024, is anticipated to enhance earnings per share and shareholder value by reducing the number of outstanding shares.

Assured Guaranty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Assured Guaranty's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.5% today to 32.8% in 3 years time.
• Analysts expect earnings to reach $296.7 million (and earnings per share of $7.62) by about March 2028, down from $373.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 11.1x today. This future PE is greater than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Assured Guaranty Future Earnings Per Share Growth

Risks

• The impact of interest rate fluctuations on Assured Guaranty's investment portfolio can cause volatility in the difference between book and operating value, potentially impacting both revenue and net margins.
  
• Exposure to troubled credits, such as the PREPA situation and specific healthcare transactions, may lead to increased loss expenses, impacting net margins and earnings.
  
• High labor costs and operational risks associated with healthcare facilities can complicate financial performance, increasing the likelihood of booking losses that could affect net margins and earnings.
  
• Market dependency, particularly in regions like the U.K. water sector, exposes the company to regulatory and economic changes which could impact financial performance, particularly revenues.
  
• The complexity of ongoing litigation, such as the PREPA case and potential market disruptions like California wildfires or government efficiency efforts, poses legal and operational risks, potentially influencing strategic financial outcomes and net margins.

Valuation

• The analysts have a consensus price target of $106.5 for Assured Guaranty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $116.0, and the most bearish reporting a price target of just $95.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $904.8 million, earnings will come to $296.7 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $82.9, the analyst price target of $106.5 is 22.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.