Bullish on AFLAC's Duck


By Gene Marcial This ugly duckling may yet turn out to be a swan -- in the investment world. AFLAC (AFL), the world's largest provider of supplemental cancer insurance -- and which uses a talking white duck in its TV commercials -- has been in a slump since hitting a 52-week high of $35.21 a share on June 2, 2001. But after skidding to a low of 23 on Sept. 21, the stock has been edging higher, rising to 29 by Apr. 29.

Many investors have little expectations, though, that the Columbus (Ga.) company will be able stay above water: Two-thirds of its sales and earnings come from Japan, whose economy has been moribund for years. But AFLAC has several true believers.

One of them is Stephen Leeb, president of Leeb Capital Management and editor of the Personal Finance newsletter in Mclean, Va. "The big story for AFLAC now is its increasingly rapid growth in the more lucrative U.S. market," says Leeb. He notes that the ubiquitous AFLAC duck in its ads "is emblematic of the company's major and highly successful marketing push in the U.S."

"CLEAR LEADER." Leeb believes that operating earnings derived in the U.S. will shoot up by 2003, to as much as 35% of the total from 28% now. And while growth in Japan has dropped to the single-digit levels, says Leeb, it's likely to return to at least the low double digits by next year.

Most of the cancer supplementary insurance that AFLAC underwrites is sold through trade and employee organizations. It also sells life and accident insurance, Medicare supplementary insurance, and long-term convalescent-care policies.

As a "clear leader in a market with high barriers to entry," AFLAC is a "top beneficiary" of a most immutable trend -- a graying population in Japan and the U.S., argues Leeb. And AFLAC's "strong balance sheet" and annual repurchases of more than 2% of its shares outstanding "add to the stock's appeal," he says. The board recently authorized the buyback of an additional 25 million shares, bringing the total to be repurchased to 29 million.

Leeb forecasts that long-term earnings growth should well exceed 15% for the foreseeable future. He thinks the stock could advance to 45 a share over the next 12 months.

PROFIT FUEL. Another bull on AFLAC is Value Line analyst Anthony Pandolfi. U.S. operations "will likely be the key to earnings growth," he says. But even as AFLAC's domestic growth has been rising, its Japanese operations are starting to rebound, after posting "dismal results" in 2001, notes Pandolfi. He's upbeat over AFLAC's long-term prospects: "Double-digit growth rates, combined with high-margin products, will likely fuel profits over the next three to five years," says Pandolfi.

AFLAC is trying to combat slower insurance-premium growth in Japan by introducing higher-margin products, such as stand-alone whole-life medical insurance, says Pandolfi. He expects AFLAC's Japanese operations to gain momentum as the year progresses and "may well provide upside surprise" to his 2002 earnings estimate of $1.51 a share, based on revenues of $10.1 billion and net income of $800 million.

He expects AFLAC's earnings to hit $875 million in 2003, or $1.70 per share, on revenues of $10.7 billion. That compares to 2001 net income of $687 million, or $1.34 per share, on revenues of $9.6 billion. He thinks AFLAC's stock has the potential for above-average long-term price appreciation.

If these pros are right, AFLAC's nearly ubiquitous talking white duck may, indeed, know what it's quacking about. Marcial is BusinessWeek's Inside Wall Street columnist


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