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AFLAC Incorporated (AFL): Do Low Expectations Mean There Is Upside in This Stock?

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Call me an optimist, but it seems like the market isn’t giving enough credit to AFLAC Incorporated (NYSE:AFL)’s management. At the present time, this company that has historically grown both earnings and its dividend and an admirable pace is selling for a lower forward P/E ratio then several of its competitors. Concerns over the company’s exposure to the Yen, and questions about the company’s ability to grow its investments seem to be holding the stock back. While the shares have rallied over the last few months, it seems that investors are still undervaluing the power of this brand.

Low Expectations = Upside Surprise?
In just a few weeks, AFLAC Incorporated (NYSE:AFL) will report earnings and investors will get a glimpse into how the company is doing. Last quarter, the company reported reasonable growth that was hampered by unfavorable exchange rates. I would argue that investors need to take a longer-term approach and look for organic strength in the company’s business as opposed to focusing on short-term exchange rate challenges.

AFLAC IncorporatedThere’s no question that AFLAC Incorporated (NYSE:AFL) can improve its operations, but for long-term investors these challenges might be seen as an opportunity to improve results in the future. One of the issues facing the company is analysts have cut their earnings growth estimates over the last few years from a historic norm of between 10% and 15% growth, in today’s growth expectations of just less than 7%.

By comparison, competitors such as The Allstate Corporation (NYSE:ALL) and Travelers Companies Inc (NYSE:TRV) are both expected to see earnings growth of around 8% to 9% over the next few years. The formerly troubled American International Group Inc (NYSE:AIG) is actually expected to outperform its peers by growing earnings at a more than 12% rate. As you can see, analysts don’t expect much from AFLAC Incorporated (NYSE:AFL) and these low expectations could provide room for an upside surprise.

Organic Growth and a Relatively Low Valuation
When I look at earnings reports from any company, I try to ignore short-term currency fluctuations and look for growth in their core products. AFLAC Incorporated (NYSE:AFL) Japan saw organic revenue increased 9.7%, premium income jumped by 9.8%, and net investment income increased by 7.3%. While AFLAC U. S. didn’t perform as well, the company still saw a 3.9% increase in revenue backed by a 4% increase in premium income. As you can see, last quarter AFLAC did grow its business, but currency fluctuations caused earnings per share to decrease by 2.87%.

With clear organic growth, I’m more comfortable with AFLAC Incorporated (NYSE:AFL)’s projected P/E ratio of about 9.6. Relative to its peers, Allstate and Travelers Companies Inc (NYSE:TRV) will sell for about 11 times projected earnings. AIG at present sells for roughly 12 times projected earnings, and this lower valuation from AFLAC means investors are expecting much. If the exchange rate between the U. S. dollar and the Japanese Yen improves, AFLAC’s results would change dramatically.

Pricing Power or Opportunity for Growth?
If you’re looking for strength in AFLAC Incorporated (NYSE:AFL)’s business model, one number that nearly jumps off the page at me is the company’s operating margin. In the last quarter, AFLAC’s operating margin was nearly 22%. For point of comparison, the only competitor to perform better was AIG at 23.6%. Travelers Companies Inc (NYSE:TRV) reported a margin of 19.28%, and The Allstate Corporation (NYSE:ALL)’s margin came in at 13.3%. It’s possible that AFLAC’s relatively high operating margin could be successfully lowered to generate better growth.

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