Aflac (AFL) sells supplemental medical and life insurance in the U.S. and Japan. 73% of the company's revenue comes from the Japanese segment.
When Aflac missed its estimates at the end of January for the fourth quarter (earnings missed by $0.03 and revenue missed by $0.1B), investors were not happy. It had more revenue from Japan but AFL still issued grim warnings for 2012 as being very 'cautious' that forecasted earnings will be below street value.
Even before this, in early (mid January) UBS downgraded Aflac from neutral to sell. This is significant. Not often does a company downgrade below neutral unless it is sure of itself. Presently trading at 44.73, UBS gave them a downward target price of $34. This is a 23% downside. They based this upon the continuing turmoil in Europe. 26% of AFL's portfolio investments rest in European bonds.
Ploutos of Seeking Alpha wrote an article on Aflac's European Debt problems February 6th. A great article to read! In that article he gave us this investing outlook:
"If you are concerned about the European situation, Aflac is not the investment for you, and despite its continued efforts to right-size these exposures, this will be an ongoing process and will lower future earnings as Aflac is forced to reinvest the proceeds in a low rate environment."
With this in mind and the fact that AFL mentioned a cautious 2012 revising downward of its earning estimates, we are looking to take a bearish position in an options strategy to take advantage of the company's downturn. It appears the company peaked at the beginning of 2011 at just over 55 then has been slowly moving down until September when it started moving up again. Recently it hit a major resistance that it bounced off of at about 50.35. From here the consensus is that it will continue to move down.
The Options Play
We are looking at a Bear Put Spread just (OTM) and far enough out that AFL could rebound a bit before it turns down. Here is our play:
- Buy an August 2012 '44' put option (priced at $3.45)
- Sell an August 2012 '43' put option (priced at $2.95)
- Net Debit to Start: $0.50
- Maximum Profit: $0.50
Reasoning behind the Trade
- UBS recent downgrade to sell with a price target of 34 says bear all over it.
- Aflac cautiously suggests revising earning for 2012 downward.
- Downward revisions don't sit well with investors.
- Bouncing off strong resistance we believe it will remain bearish through much of the first half of 2012.