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AFLAC: Duck Soup or BMW Candidate?

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By StuyvesantGrad70
November 9, 2006

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AFLAC (AFL)
Current price $45.07
Dividend $0.74, yield 1.64% (will increase 42% year over year in 2007)

MKlein's 20 year BMW chart:
http://invest.kleinnet.com/bmw1/stats20/AFL.html
Stock is below -2.0 RMS, first time in 15 years. Return factor 1.51

Motley Fool article: 7/26/06: AFLAC and its Mighty Duck
http://www.fool.com/news/mft/2006/mft06072641.htm
AFLAC sells supplemental health and life insurance that covers hospital stays or general medical expenses, which private or government insurance may not cover. Aging population and rising cost of health care enhance appeal of supplemental insurance. Plenty of growth possible in U.S. and Japan, and could expand to rest of world.

74% of revenues from Japan, rest from U.S. Weak yen causes sales and earnings suffer to when translated to $U.S. Company isn't actually converting yen into dollars, but has to do so for financial reporting purposes. Competition hurt Q2 sales, will weaken results for rest of year. Q2 operating earnings up 17.2% (or up 20.3% if you ignore weaker yen). Q2 sales up only 3%. Trailing P/E of 15 for a company growing earnings 18% a year for past 5 years looks compelling. Operating cash flow 3 times higher than reported net income.

Latest Motley Fool article: 10/26/06: http://www.fool.com/News/mft/2006/mft06102605.htm?ref=foolwatch
Q3 revenue flat due to weak yen. Q3 06 earnings fell 19% due to Q3 05's higher investment gains and deferred tax benefit. Operating earnings up 12.1% excluding yen currency effects. Analysts worried about weak sales trends in Japan.

S&P Report:
BUY, 4 Stars:
Total new premium sales will decline in 06 and first half of 07, but will improve by mid 07 due to focus on training and distribution in Japan in an increasingly crowded market. Increased ad spending and a solid distribution network should help AFLAC remain competitive. Slowly rising interest rates in Japan and a rebounding economy should boost investment income and new premium sales.

M* Report:
HOLD, 3 Stars:
Wide moat: Outstanding brand recognition, low cost structure, industry leading client retention (95% each year), clear market leader in Cancer insurance. Japan: aging population, declining birth rate, high government debt are squeezing publicly funded insurance program, increasing demand for AFLAC's products. AFLAC's operating expenses are less than half of its competitors. Converting some policies from payroll to direct billing. This pressures short term sales as agents redirect their focus, but should improve profitability in the long run. Rising U.S. health care costs should increase demand in U.S. Agent recruitment is back on track in U.S., but is a problem in Japan. Low investment yields will persist in Japan as higher yielding securities mature. Thanks to the duck, 90% name recognition in U.S. and higher in Japan.

Smith Barney (Citigroup) Report:
HOLD
Japanese sales: Down 11.9% in Q3 (earnings up 8.4%)
U.S. sales: Up 11.7% in Q3 (pretax earnings up 21.7%)
With ROE of 22.4% for 2007, AFLAC will continue to achieve above average earnings gains and superior profitability compared to its peers, but long term earnings growth rate will decline from historical 15% to 12% due to weakness in Japanese sales resulting from increased competition and agent recruiting issues in the U.S.

EPS
1996 $0.68
1997 $1.04
1998 $0.88
1999 $1.04
2000 $1.26
2001 $1.28
2002 $1.55
2003 $1.52
2004 $2.52
2005 $2.92
2006 YTD as of Q3 $2.26 (06 Estimate $2.91)

Revenue $B
1996 7.10
1997 6.98
1998 7.10
1999 8.64
2000 9.72
2001 9.60
2002 10.26
2003 11.45
2004 13.28
2005 14.36
2006 YTD as of Q3 10.93


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