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On Jul 17, 2013, we upgraded our recommendation on Aflac Inc. (AFL - Analyst Report) to Neutral based on its capital strength and an improved sales outlook. However, lingering concerns regarding weak investment income and exchange rate remain static.

Why the Upgrade?

Estimates for Aflac have witnessed a steady decline since its first-quarter 2013 results on Apr 24. The company’s first-quarter earnings per share of $1.69 comfortably surpassed the Zacks Consensus Estimate of $1.62, but lagged the year-ago quarter’s earnings of $1.74. Additionally, total revenue of $6.21 billion missed the Zacks Consensus Estimate of $6.27 billion but inched up 0.5% on a year-over-year basis.

Anticipating some improvement in the upcoming quarters, the Zacks Consensus Estimate for 2013 has inched up 0.3% to $6.18 per share in the last 30 days. However, the same remained intact at $6.52 for 2014. With the Zacks Consensus Estimates of both 2013 and 2014 showing no clear directional pressure in the near term, Aflac now has a Zacks Rank #3 (Hold).

While the sluggish economy in both the US and Japan has deterred the desired upside in Aflac’s sales, earnings and investment portfolio, we believe that the company is still supported by strong risk-based capital and surplus cash. Adequate liquidity not only paves the way for mitigating risk on balance sheet and operating leverage but also scores well with the ratings agencies.

Despite weak dollar/yen exchange rate, low interest rates and difficult comps, Aflac maintains slow but viable growth guidance. Moreover, sales in Japan are expected to pick up in the second half of 2013 based on the introduction of new products and deliberate expense management. Consistent dividend increment and share buybacks further instil investor confidence.

Other Financial Stocks That Warrant a Look

While we prefer to remain at the edge on Aflac until we see some improvement in its financial performance, HCI Group Inc. (HCI), Employers Holdings Inc. (EIG) and Hilltop Holdings Inc. (HTH - Analyst Report) carrying a Zacks Rank #1 (Strong Buy) appear impressive.

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