"Aflac (NYSE: ) is delivering solid growth in operating pro?ts despite the recession, " says Richard Moroney. Here's his latest from the blue-chip Dow Theory Forecasts.
"Aflac is a low-cost provider of supplemental life and health insurance in Japan and the U.S. The firm' investment portfolio, vulnerable to the fate of European banks, has kept the company in hot water.
"Its total investments and cash totaled $65.6 billion at the end of June, up 6% from the end of March. Since February, investors have feared investment losses could swamp the stock. The primary culprit is European hybrid securities issued by banks at risk of nationalization.
"So far, those fears appear exaggerated — values of European securities have begun to recover. Unrealized losses on investments available for sale are $4.9 billion, roughly 7% of the total portfolio and down from $5.9 billion in March.
"The company realized $249 million in investment losses during the June quarter, on top of a total of $268 million in losses in the March and December quarters.
"Management expects another $374 million in investment losses for the remainder of the year. Severe losses could force A?ac to raise more capital, but so far they appear manageable, and A?ac believes it has seen the worst.
"However, until those investment-related fears are resolved, A?ac — known for its ubiquitous spokesduck — must rely on strong operating performance and a sound balance sheet to win Wall Street’s affection.
"Per-share pro?ts rose in least 14 consecutive years before 2008, and the dividend has been raised in each of the last 27 years.
"In the June quarter, A?ac earned $1.20 per share excluding special charges and investment losses, up 19% and $0.07 above the consensus. The yen’s strength against the dollar boosted earnings by $0.05 per share. Revenue fell slightly to $4.31 billion.
"The Japan unit (74% of revenue in the past 12 months) grew sales 15% over the last year, while the U.S. segment managed 5% growth. That growth comes as A?ac pursues new venues to sell its insurance products.
"A?ac products are sold in 346 Japanese banks; sales through that channel jumped 106% in the June quarter. On July 1, the number of post of?ces selling A?ac insurance more than tripled to 1,000.
"A?ac shares have more than tripled from the March low but still offer plenty of upside potential. The company expects per-share growth of at least 13% to 15% in operating pro? ts this year, though continued strength in the yen could render that target conservative.
"At eight times Wall Street expected earnings for the next 12 months, A?ac trades at a 42% discount to its three-year average forward P/E ratio. With consensus pro?t estimates for this year and next rising, A?ac is a Long-Term Buy.
