Is Aflac Still a Buy?

Aflac Inc. (NYSE: AFL) recently gave its outlook, but considering a weakening yen over the past month, analysts have become wary. Janney Capital recently reduced its earnings per share (EPS) estimate to $6.30 from $6.45.

While the outlook call was disappointing because of the estimate reduction, the firm continues to believe Aflac offers good value in the context of improving cash flows, a strong balance sheet and a fundamentally straight-forward and sound business model.

In its report, Janney detailed:

We would break down the $.15/share 2016 estimate reduction as follows: (1) about $.06 comes from incorporating an average yen for the year of 124 compared to our earlier estimate of 122, (2) $.06 comes from reducing our Japan premium assumption to 0.8% from 2.1%, and (3) most of the balance comes from a reduction in Japan NII, which is driven by maturing and callable private investments.

The company introduced sales growth guidance of down mid-single digits for Japan third sector products and up 3% to 5% in the United States. While the Japan number is disappointing and below expectations, it is at least partially explained by the strong growth experienced in 2015. Entering the year, the company had estimated Japan third sector sales growth through nine months would be 15%; the fourth quarter, which had a very difficult comparison, was expected to be down significantly.

Aflac had fine-tuned its sales growth expectation after the second quarter, when it projected that sales would be up 7% to 10% for the full-year 2015 (which it said was much higher than its original expectation). After the third quarter, the expectation was increased to 10% to 13%, and on the outlook call the company said it expects to come in at the high end of that range. Taken together, Janney didn’t think the combined 2015 and 2016 sales will turn out much different than if the company had produced the annual mid-single digit growth that was likely expected coming out of 2014.

The firm concluded its report saying:

Yesterday’s reaction to the Outlook call (-3.8%) was a bit more severe than we would have expected, recognizing the overall market weakness. Alfac [sic] now sells at 10 times our revised 2016 estimate, which is a discount to Life Insurance peers, especially those without annuity tail risk. Aflac is disliked by the Street (5 Buys; 15 Holds; 1 Sell) and, most importantly, should have an improving free cash flow profile prospectively with deployable capital of between $6.3 billion and $7.5 billion over the next 3 years.

Shares of Aflac were last seen trading up 0.7% at $63.55, with a consensus analyst price target of $68.36 and a 52-week trading range of $51.41 to $66.53.
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