Quack! Profits for AFLAC

06/04/2004 12:00 am EST

Focus:

Dan Kurz

Editor, DK Equities

From the US to Japan, the AFLAC duck has become one of the most popular advertising icons. The stock is also a favorite of Dan Kurz , editor of DK Equities Newsletter. He notes, "We just attended AFLAC’s annual analyst pow wow, and we remain quite wowed."

"One of our current investment themes is inflation visibility. Specifically, this allows us to revisit healthcare insurance inflation in the form of rising premiums, declining healthcare insurance coverage, and the opportunity this spawns for the number one supplemental insurance company in Japan and the US, AFLAC (AFL NYSE). We’ve sunk our teeth into management’s bullish claims and forecasts yet again. The bottom line: mid-teens double-digit earnings growth appears eminently attainable for the next few years for this uniquely positioned firm. Trading for a bit over its estimated five-year EPS compounding rate we confirm AFLAC’s buy coding.

"AFLAC is the world’s best-positioned underwriter of supplemental healthcare insurance. Its earnings growth targets have consistently been met or surpassed (usually surpassed) during the past decade, a record supported by predictable claims ratios as well as by recurring revenue sources. The firm faces favorable demographic (aging populations) trends. Meanwhile, declining healthcare coverage in both Japan and the US will continue to provide an excellent supplemental insurance demand growth backdrop that AFLAC will seek to leverage. We’d also note that AFL shareholders would be major beneficiaries of higher Japanese interest rates as this would help stabilize the return on average assets.

"The AFLAC Duck has been successfully exported as AFLAC’s mascot in Japan, becoming a true ‘dual national’. Not only has the duck been taught Japanese, but he’s starred in the second most memorable commercial song in the history of Japanese TV, doing his bit to sustain AFLAC Japan’s 97% brand awareness. The duck has been busy plugging AFLAC Japan’s highly successful new stand-alone whole life medical indemnity insurance, as AFLAC continues to capitalize on a shift in consumer preference away from traditional death benefits to ‘living’ benefits. Steeply rising national medical expenses accompanied by large reductions in nationalized major medical coverage imply growing per capita out-of-pocket medical expenses and strong potential demand for AFLAC’s ‘living benefit’ products. This is especially true when considering AFLAC’s strong reputation regarding both financial strength and low premiums/favorable relative benefit ratios.

"Shifting to AFLAC’s US operations, we’d note that new sales growth momentum is back after lagging last year. As at AFLAC Japan, AFLAC US has the tailwind of a bullish supplemental insurance growth environment working in its favor to capitalize on with its greatly expanded AFLAC Duck-brand recognition and broadened product portfolio. Overall,AFLAC shares warrant inclusion in portfolios of virtually any stripe. This is due to the marketing-driven insurer’s sustainable differentiation earmarks; its laser beam-like focus on its supplemental insurance markets; and a promising growth outlook for supplemental insurance sales in both Japan and the US. That outlook, in turn, is based on favorable demographics (aging populations) and decreasing major medical insurance coverage. When combined with an attractive relative valuation our buy rating is affirmed."

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