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Aflac (AFL) Hits New 52-Week High: Is More Upside Left?

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Shares of Aflac Inc. (AFL - Free Report) scaled a 52-week high of $91.3 on Jan 9, eventually closing a tad lower at $90. The gain is believed to be driven by the positive impact of the recently signed tax reform.

What Aided the Price Rise

The company recently announced that it will invest $250 million in different areas such as employee welfare, business growth and provide support to childhood cancer initiatives.

This development follows the recent passage of the tax reform by Donald Trump, which cuts the corporate tax rate to 21% from 35%. Per management, this easy tax regime provides it an opportunity to make investments like the latest one.

Moreover, for its U.S workforce, Aflac intends to make better retirement benefits by increasing the company's 401(k) match from 50% to 100% on the first 4% of employee’s contribution while making a one-time contribution of $500 to every employee's 401(k) plan. It will also offer certain hospital and accident insurance products to all employees free of charge as the company currently does with its core cancer insurance products.

On the business growth front, the company plans to invest in the technology and digital businesses like Empowered — a subsidiary of Aflac.

Share Price Performance

Aflac’s stock has gained 29.6% in a year’s time, outperforming its industry’s growth of 21.5%.

Is Further Upside Left?

This Zacks Rank #4 (Sell) stock continues to suffer from:

Conversion Costs: Aflac is in the process of converting its Japan branch into a subsidiary. This, in turn, will enhance its business development flexibility. In fact, the  company has booked approximately $24 million in pretax costs associated with its Japan branch conversion in the first nine months of 2017.

The conversion remains on track and the company expects to incur conversion costs of $120 million to $130 million pretax through mid-2018. These costs will hurt the company’s margins in the coming quarters.

Pressure on Business in Japan: Aflac’s top line remains sufficiently exposed to a challenging operating environment, primarily in Japan, which contributes nearly 70% of the company’s revenues. The persistent low interest rate environment has led the company to deemphasize sales of first-sector (life insurance) products in the region.

The curtailment of these products as well as weakening of yen has led to a decline in revenues by 0.3% in 2016 and 5.7% in the first nine months of 2017. Going forward, the restriction on sale of first-sector products, which carry higher premiums along with currency volatility are further expected to suppress top-line growth in the region.  

Forex Volatility: The company’s significant exposure to Japan makes its vulnerable to foreign currency volatility. Evidently, Aflac’s earnings have been hampered by the alarming weakening of the Japanese yen relative to the U.S. dollar for the past many years.

While foreign currency adversely impacted bottom line by 34 cents in 2016, the weaker yen/dollar exchange rate hurt operating earnings per diluted share by 8 cents in the first nine months of 2017. Currency volatility is expected to continue affecting earnings in the coming quarters.

Overvalued: Aflac's valuation looks stretched at the current level. The company currently has a trailing 12-month price-to-book (P/B) ratio of 1.6, near its highest range. The ratio is also higher than the P/B ratio of 1.4 for the industry.

Based on the above-mentioned factors, we believe the stock will remain under pressure in the near term.

Stocks to Consider

Some better-ranked players in the space are Amerisafe, Inc. (AMSF - Free Report) , Trupanion, Inc. (TRUP - Free Report) and Unum Group (UNM - Free Report) carrying a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amerisafe’s beat estimates in two of the four quarters with an average positive surprise of 1.4%.

Trupanion beat estimates in three of the last four quarters with an average positive surprise of 38.8%.

Unum beat estimates in each of the last four quarters with an average positive surprise of 3.2%.

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