Rating Update: Stock Rating C-High Neutral (8/15/19)-AFLAC Inc (AFL).

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BUSINESS

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus, provides voluntary supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. The Aflac Japan segment offers voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. The Aflac U.S. segment provides products designed to protect individuals from depletion of assets comprising accident, cancer, critical illness/care, hospital indemnity, fixed-benefit dental, and vision care plans; and loss-of-income products, such as life and short-term disability plans in the United States.
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INVESTMENT RATING

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AFL’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.

AFLAC has a current Value Trend Rating of C (High Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. AFLAC has a slightly negative Appreciation Score of 34 but a good Power Rating of 78, and the High Neutral Value Trend Rating results.

AFLAC’s stock is selling above targeted value. The current stock price of $52.07 compares to targeted value 12 months forward of $49.
This moderately low appreciation potential results in an appreciation score of 34 (66% of the universe has greater appreciation potential.)
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AFLAC has a Power Rating of 78. (AFLAC’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 22% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and the recent trend in AFLAC’s earnings estimates has been favorable. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

AFLAC’s financial strength is exceptional. Financial strength rating is 95.
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Relative to the S&P 500 Composite, AFLAC Inc has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that AFL is lower risk. Low expected growth is a relative weakness for AFLAC. AFLAC’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. AFL has high market capitalization.

CURRENT SIGNALS

AFLAC’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; and falling tax keep rate.

AFLAC’s current technical position is very strong. The stock price is in a 46.9 month up move. The stock has appreciated 101.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

AFLAC Inc (NYSE: AFL) suffers from meaningful negative changes in investment behavior: negative upside/downside volume developed.
The stock is currently rated C.
On 8/15/19, AFLAC Inc (NYSE: AFL) stock suffered a major decline of -22.2%, closing at $0.04. NORMAL trading volume accompanied the decline. The stock has been strong relative to the market over the last nine months but is unchanged during the last week.

CASH FLOW

In 2018, AFLAC generated a significant increase in cash of +$765 million (+16%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$4,770 million. Non-operating uses consumed -$85 million (-2% of EBITDA). Cash taxes consumed -$2,135 million (-45% of EBITDA). Withdrawal of investment from the business totalled +$2,004 million (+42% of EBITDA). On a net basis, debt investors provided +$267 million (+6% of EBITDA) while equity investors removed -$4,056 million (-85% of EBITDA).
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AFLAC’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Aflac Inc Peer Group. In most years, AFLAC was in the top quartile. Currently, AFLAC is slightly below median at -2% of EBITDA (-$85 million).

AFLAC’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Aflac Inc Peer Group as well. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, AFLAC was in the top quartile and lower quartile. Currently, AFLAC is lower quartile at -45% of EBITDA (-$2,135 million).

AFLAC’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Aflac Inc Peer Group. In most years, AFLAC was in the second quartile and third quartile. Currently, AFLAC is above median at +42% of EBITDA (+$2,004 million).

AFLAC’s Debt Investors, %EBITDA has experienced a strong overall downtrend over the period. This downtrend was accompanied by stability for the Aflac Inc Peer Group. In most years, AFLAC was in the second quartile and top quartile. Currently, AFLAC is slightly above median at +6% of EBITDA (+$267 million).

AFLAC’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Aflac Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, AFLAC was in the third quartile and top quartile. Currently, AFLAC is substantially below median at -85% of EBITDA (-$4,056 million).

AFLAC’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Aflac Inc Peer Group. In most years, AFLAC was in the top quartile and lower quartile. Currently, AFLAC is upper quartile at +16% of EBITDA (+$765 million).
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AFLAC’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Aflac Inc Peer Group. (Since 2016 Cash, %Revenue has experienced a sharp decline.) In most years, AFLAC was in the third quartile and lower quartile. Currently, AFLAC is at the lower quartile at +25%.

PROFITABILITY

AFLAC’s return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
This very significant erosion was due to little change in pretax operating return supported by strong negative trend in non-operating factors.
The productivity of AFLAC’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
Partially offsetting this trend, however, pretax margin enjoyed a strong overall uptrend but it experienced a small decline after the 2013 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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AFLAC’s return on equity is below median (11.0%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is slightly above median (2.8%) reflecting asset turnover that is at median (0.15X) and below median pretax margin (19.1%).
Tax “keep” rate (income tax management) is lower quartile (73.8%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is substantially below median (5.36X).

GROWTH RATES

There are no significant differences between AFLAC’s longer term growth and growth in recent years.
AFLAC’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 3.3% per year.

Total asset growth has been 7.1% per year.

Annual E.P.S. growth has been 9.2% per year.

Equity growth has been 14.0% per year.

AFLAC’s consensus growth rate forecast (average of Wall Street analysts) is 4.2% — below the average of the historical growth measures.
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Relative to the Aflac Inc Peer Group, AFLAC’s historical growth measures are erratic. Equity growth (14.0%) has been upper quartile. Total asset growth (7.1%) has been substantially above median. E.P.S. growth (9.2%) has been at median. Revenue growth (3.3%) has been below median.

Consensus growth forecast (4.2%) is lower quartile.
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PRICE HISTORY

Over the full time period, AFLAC’s stock price performance has been slightly below market. Between October, 2008 and August, 2019, AFLAC’s stock price rose +135%; relative to the market, this was a -20% loss. Significant price moves during the period: 1) May, 2012 – June, 2019: +174%; and 2) February, 2009 – March, 2010: +224%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 15.6% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through July, 2019 of 15.6% is at the upper quartile relative to AFLAC Inc Peer Group.

Current 5-year total return performance of 14.7% is above median relative to the S&P 500 Composite.
Through July, 2019, with above median current 5-year total return of 14.7% relative to S&P 500 Composite, AFLAC’s total return performance is upper quartile relative to AFLAC Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, AFL’s overall valuation is quite low. The highest factor, the price/earnings ratio, is at the lower quartile. Ratio of enterprise value/revenue is near the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.

Relative to AFLAC Inc Peer Group, AFL’s overall valuation is normal. The highest factor, the price/earnings ratio, is near the upper quartile. Price/equity ratio is at the upper quartile. Ratio of enterprise value/assets is below median. Ratio of enterprise value/revenue is below median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is near the lower quartile.
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AFLAC has a large value gap compared to the median valuation. For AFL to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.80X to 2.13X. If AFL’s ratio of enterprise value/revenue were to rise to 2.13X, its stock price would be lower by $10 to $62.
For AFL to hit lower quartile valuation relative to the AFLAC Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.80X to 1.60X. If AFL’s ratio of enterprise value/revenue were to fall to 1.60X, its stock price would decline by $-6 from the current level of $52.

VALUE TARGETS

AFL’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.
AFLAC’s current Price Target of $50 is little changed from the current price of $52.07.
This moderately low appreciation potential results in an appreciation score of 34 (66% of the universe has greater appreciation potential.)
Notwithstanding this moderately low Appreciation Score of 34, the high Power Rating of 78 results in an Value Trend Rating of C.
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AFLAC’s current Price Target is $50 (+13% from the 2018 Target of $44 but -5% from the 08/15/19 price of $52.07). This slight rise in the Target is the result of a +4% increase in the equity base and a +9% increase in the price/equity multiple. The forecasted increase in return on equity has a large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a slight negative impact.
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PTR’s return on equity forecast is 13.3% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 24%.

PTR’s growth forecast is 5.0% — slightly below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2012 peak of 15%.

PTR’s cost of equity forecast is 10.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2013 peak of 12.9%.
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At AFLAC’s current price of $52.07, investors are placing a positive value of $14 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 12.6% versus a cost of equity of 11.0%.
PTR’s 2020 Price Target of $50 is based on these forecasts and reflects an estimated value of existing assets of $43 and a value of future investments of $7.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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