Monday, November 12, 2007 2 comments ++[ CLICK TO COMMENT ]++

Analysis of Ambac by jckhoury at gurufocus.com

A poster by the name of jckhoury at gurufocus.com has posted an investment review of Ambac (ABK). He/she provides an overview of the situation and comes up with some estimates of the intrinsic value of Ambac. The author's optimistic scenario results in a price of $83.74, while the pessimistic case ends up being $15.75. Note that the pessimistic case results in a price below the current stock price. If you are thinking of Ambac or one of its competitors like MBIA, it's worth reading as many opinions as you can so do check out the article.

In my opinion, the real issue with Ambac is pinning its risk to some dollar figure. The valuation seems pretty attractive under most scenarios but the risk of some serious adverse result is highly uncertain. Any success or failure with Ambac will come from correct determination of its risk.

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2 Response to Analysis of Ambac by jckhoury at gurufocus.com

Michael
November 12, 2007 at 11:41 PM

One rating agency downgrade and the intrinsic value goes to zero. Rather than analyze ABK the stock, perhaps one should analyze what's going on in Moody's or S&P's analysts' brain cells and motivations.

November 13, 2007 at 10:56 AM

Thanks for touching on an important issue Michael. I agree with the thrust of your thought in saying that rating cut is extremely crucial.

I don't think the value drops to zero if rating gets cut from, say, AAA to AA. It will be a disaster but it still isn't zero.

Furthermore, a rating cut for the large monolines (Ambac and MBIA) is a very low probability because the rating agencies will give time for the monolines to raise capital. This won't be good for shareholders (it will result in heavy dilution) but it will result in the rating being maintained.

Overall, I agree with you that one needs to consider what the rating agencies are planning to do. I covered a news article in one of my prior posts which said Fitch was reviewing the capital adequacy of these firms. They said they will release their opinion in a few months (I'm reading that as December or early January).

I still think one needs to peg a value to the company. That's what value investors (including contrarians like me who pretend to be one ;) ) do and without it you don't know the margin of safety.

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