Life insurers and healthcare plan companies are preferred on the Street with Aflac (AFL), Cigna (CI) and WellPoint (WLP) all receiving "buys". Based on my review of the fundamentals and multiples analysis, I find strong upside for all of the firms.
From a multiples perspective, all three are relatively cheap. Cigna trades at a respective 8.2x and 7.5x past and forward earnings, WellPoint trades at a respective 9.2x and 7.8x past and forward earnings, Aflac trades at a respective 11.5x and 6.8x past and forward earnings. To put this into perspective, consider that Aflac is currently valued at 79% of its historical 5-year average PE multiple versus 71% for Cigna and 95% for WellPoint.
At the fourth quarter earnings call, Aflac's Chairman & CEO, Dan Amos, noted particularly srong performance in Japan:
We were again pleased with Aflac Japan's financial performance and particularly the tremendous sales momentum they produced. New annualized premium sales rose 31% to 48.6 billion yen for the quarter, which significantly exceeded our expectations and set all-time quarterly record. Aflac Japan outstanding sales results are especially remarkable considering 2011 was the year Japan was hit by the most devastating natural disaster in its history. For the year, total new annualized premium sales rose 18.6%. Though suppressed by the strong yen, revenue growth in yen rose 6% the quarter and 4.5% for the year. Pre-tax earnings rose 8% for the quarter and 6.8% the year.
As recent volatility has recently confirmed, the main headwinds for Aflac include low interest rates and exposure to the sovereign debt crisis in Europe. Aflac still has around $1.9B exposure to European financials, which I believe will help drive risk-adjusted returns as the new CIO restructures the portfolio. Fourth quarter results were a slight miss, largely due to greater-than-anticipated advertising and tech expenses. Regrettably, the company had an after-tax investment loss of $522M and it possibly has a half a year more worth of impairments. This may limit the companies capital allocation policy; but, for now, investors should expect buyback activity of around $300M for 2012.
Consensus estimates for Aflac's EPS forecast that it will grow by 5.2% to $6.66 in 2012 and then by 6.6% and 7.5% in the following two years. Assuming a multiple of 9.5x and a conservative 2013 EPS of $7.04, the rough intrinsic value of the stock is $66.88, implying 39.3% upside.
As for Cigna, I am optimistic about Health Spring in terms of the revenue synergies that will unlock in Group Medicare. Previously, Cigna lacked attractive exposure to Medicare; now, not only does it have that exposure, but it also has the ability to cross-sell enrollees in Commerical more than ever. The company delivered a solid close to the year with impressive momentum across the targeted geographies and segments.
Consensus estimates for Cigna's EPS forecast that it will grow by 4.6% to $5.45 in 2012 and then by 11% and 15.4% in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of $5.94, the rough intrinsic value of the stock is $53.46, implying 19% upside.