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Bad Press Can Bring Good News: (AFL)

|Includes:Aflac Incorporated (AFL), CI, TRV


Fools… I’m new to the blogs but would like to introduce myself.  My name is Kevin Holloway, Value Investor, Fool and Contrarian to the fullest.  I’ve been investing for close to 5 years and learning every step of the way.  I’m 27yo from the great state of Maryland.  Currently I am going for my masters in Financial Management and hope to one day analyze stocks for a living. I've been influenced heavily by Ben Graham, John Ness, The Motley Fool and of course Warren Buffett.  I have a passion for investing and hope you get at least something worthwhile from my blog.


John Neff

I've been reading "John Neff on Investing" and came across a situation he encountered in the 80's w/ beaten down property and casualty insurance companies.  Wall Street predicted that asbestos related problems were going to be a liability of approx. $500 billion.  Wall Street overreacted and insurance stock prices moved downward significantly.  Sounds familiar...  Insurance stocks have been beaten down w/ many of the recent natural disasters in Japan and in the US, which have made for some real bargains.      

"Instead of focusing on the fate of the insurance industry if costs reached the predicted magnitude, we wondered about the impact once overreactions melted away.”  - Ness 

Neff decided to buy Cigna at its lows w/ special consideration to the low P/E and well managed business.  After the market realized the predictions were overblown Cigna's shares advanced 54% and property and casualty insurers advanced 45%.  The S&P 500 gained 29%



One of my favorite stocks right now is Aflac (AFL).  This stock has taken a beating over the last year dropping 32% from its highs w/ concerns of the natural disaster in Japan and questions about investments made in European banks.  Their investment portfolio is roughly $90 billion and most of that is outside the debt laden Euro banks.  Aflac is now selling off or already have sold off much of their exposure to the troubled European countries for a loss.  This has scared investors and has created an overblown sell off very similar to Neff’s situation in the 80’s.

Key Ratios

Div: 3.5%  (31% payout) 

Div 5yr Gwth Rate:  17.99%

Debt/Eq: 28.3

Fwd P/E: 5.4

P/FCF: 2.0



Aflac is sitting on a 2 year low and sporting a P/E around 9.  The 5yr PE stands at 15.6.  Price to Book is at 1.35 with a 5 yr P/B or 2.9.  Besides the drop in 2009 due to the U.S. subprime meltdown we are seeing some record low valuations.


Total Return Ratio

In honor of Ness I will use his Total Return Ratio (Annual Earnings Growth + Yield ÷ P/E Ratio).  Analyst estimates have Aflac’s projected 5 yr earnings at 12% growth.  As with all analyst estimates they are usually over optimistic.  I’ll play it conservative and cut Aflac’s growth rate to 6%. 

6% + 3.3% =  9.3% total return

9.3 ÷ 9 (P/E) = 1.032 

Neff considered a total return ratio of .7 as a worthy investment for further research.  Using the Fwd P/E of we get a TRR of 1.722. 


Graham Number

I also applied the Graham Number; SQRT (22.5 * EPS * BVPS)

(22.5 * 3.81 * 25.37) = $46.64

I get $46.64 which has a Margin of Safety of 33.5%


Vitaliy Katsenelson’s Absolute P/E Model

This is a new favorite of mine.  Generally, Vitaliy assigns expected earnings growth rates with a certain P/E.  A no growth stock is a P/E of 8 (Jae June and myself use a 7p/e to be safe).  Then you add the yield for the “basic P/E”.  He assigns Business risk, Financial Risk and Earnings predictability w/ a premium or discount depending on the company (avg is a 1).  I’ll probably do the full breakdown in another post, but I won’t go into it here.  The valuation is explained in great detail by Jae Jun from oldschoolvalue here. 

This is the equation:

Fair Value PE = Basic PE x [1 + (1 - Business Risk)] x [1 + (1 - Financial Risk)] x [1 + (1 - Earnings Visibility)]

I assigned a 5% discount to business risk, financial and earnings visibility.  I assigned earnings growth yet again with 6% opposed to analyst predictions of 12% growth. 

Fair Value came out to:

P/E: 12.7   FV:  $46.39  MOS:  35.1%

@ 12% growth I get a FV of $59.13



I think John Neff would love this stock.  On a value basis, a contrarian basis and fundamental basis I believe Aflac is worth investing.  I’m putting my money where my mouth is and have been investing near the lows.  As is usually the case, the market has overreacted and they’re ignoring the prospects of this company.  I’ll be waiting patiently with a 3.3% dividend for everyone else to recognize this as well.


Thanks for reading,

Kevin Holloway


Patience, perspective, valuation and conviction to go against the crowd
Stocks: AFL, TRV, CI