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Jonathan Alley
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I am currently an Honors finance student studying at the Sam M. Walton College of Business at the University of Arkansas.
  • Equity Analysis: Aflac (AFL) 0 comments
    Aug 1, 2014 9:25 PM | about stocks: AFL

    Aflac Incorporated (NYSE:AFL) is a general business holding company headquartered in Columbus, Georgia. The company generates revenues primarily through the sale of supplemental and life insurance. Aflac sells cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities among many other products. The products are sold through independent agencies, individual agencies and affiliated corporate agencies.

    Aflac's revenues are generated from 2 geographical areas: Japan and the United States. The company is the largest life insurer and cancer insurer in Japan in terms of individual policies sold, with 75% of its total revenues generating from the country. 90% of Aflac's products sold in the U.S. are within the small business community.

    Moving to the financials, this seems to be a very well-financed company. The balance sheet is very strong, with a debt/assets percentage of 6%. Its asset base has increased by nearly 45% in the past 5 years, while policy liabilities have essentially remained flat since 2010.

    Total revenues have been trending upward over the last 5 years, with earnings following the same trend. At the end of fiscal year 2013, net earnings per share were $6.76, as opposed to $4.11 at the end of fiscal year 2011. Coinciding with growth in earnings, Aflac has seen an increase in margins, with gross operating margins reaching 30% in 2013.

    (click to enlarge)

    The company also has strong operating free cash flows of over $8B. Aflac has averaged an annualized ROE of about 20% over the last 5, which is very impressive.

    At this point, you may be wondering what could possibly be scaring off potential investors. The answer lies in the company's large exposure to weakness in the Japanese economy, primarily on the weakening yen, which could substantially hinder future revenues. Another potential red flag is the implementation of the Affordable Care Act. While no one is quite sure how exactly the new regulation will shape the health care market in America, Aflac benefits from its experience in Japan, which has a nationalized health care system. Indeed, this may prove to give Aflac a distinct edge over other competitors in the nation.

    Conclusion

    Aflac is a very well run company, that grows at a steady, consistent rate. However, an investor must keep in mind the risks associated by its exposure to Japan. Although I feel the possibility of a Japanese default is unlikely, it still cannot be ignored when projecting Aflac's potential in the future. All in all, this is a company with a great brand, great financials, and room to grow.

    Buy Price: $48

    Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AFL over the next 72 hours.

    Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

    Themes: Aflac, AFL, insurance Stocks: AFL
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