by Ed Elfenbein | February 7, 2014 11:47 am
On Tuesday, my favorite insurance stock, AFLAC (AFL), reported that it quacked out a profit of $1.40 per share for the fourth quarter. That beat Wall Street’s forecast by one penny per share. But with a company like AFLAC, I honestly don’t care so much if they beat or miss earnings by a little bit. That’s not that important. This is a very well-run company, and it’s far more important to me to show what the general trend is.
As much as I like AFLAC, there’s a fundamental issue we need to consider when we look at its earnings. Since AFLAC does most of its work in Japan, its earnings can be greatly impacted by the yen/dollar exchange rate. Sometimes that works for them and sometimes it doesn’t; and lately, it hasn’t. The government in Japan has tried everything to get its economy moving, and the latest effort has been to weaken the yen. (It actually may be working.)
The downside for AFLAC is that the currency exchange ate up 18 cents per share in profit last quarter. That’s more than 11% of their bottom line. Despite the strong headwind, the company still managed to deliver a solid profit. Three months ago, AFLAC gave us a range for Q4 of $1.38 to $1.43 per share, so they’re right inside their own range.
Another problem AFLAC faces is that fixed-income yields are very low. That’s not good if you’re an insurance company. AFLAC has been working to revamp how it invests, and they’ve made it clear to investors that they’re going to try new areas. But the recent weakness we’ve seen in emerging markets could be weighing on AFL’s portfolio, though we don’t know yet exactly how much exposure they have to such markets.
The best news from AFLAC’s earnings report is that they reiterated their full-year guidance. A lot of investors downplay reiterations. Not me. It’s a good sign to hear from your company that all’s well. AFLAC sees operating earnings growing by 2% to 5% this year on a currency-neutral basis.
The company said that if the yen were to remain at 97.54 to the dollar (its average for last year), then its earnings should range between $6.31 and $6.49 per share for 2014. So the stock is going for less than 10 times this year’s estimate.
Here’s an easier way to understand their forex exposure. Every move of one yen in the exchange rate translates to 3 to 3.25 cents per share in earnings for 2014. My take: There’s no need to worry about AFLAC stock. Business is going very well.
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