John Neff
I've been reading "John Neff on Investing" and came across a situation he encountered in the 80s with beaten down property and casualty insurance companies. Wall Street predicted that asbestos related problems were going to be a liability of approximately $500 billion. Wall Street overreacted and insurance stock prices moved downward significantly. Sounds familiar... Insurance stocks have been beaten down with many of the recent natural disasters in Japan and in the U.S., which have made for some real bargains.
"Instead of focusing on the fate of the insurance industry if costs reached the predicted magnitude, we wondered about the impact once overreactions melted away.” — Ness
Neff decided to buy Cigna at its lows w/ special consideration to the low P/E and well managed business. After the market realized the predictions were overblown Cigna's shares advanced 54% and property and casualty insurers advanced 45%. The S&P 500 gained 29%
AFLAC: (AFL, Financial)
One of my favorite stocks right now is Aflac (AFL). This stock has taken a beating over the last year dropping 32% from its highs w/ concerns of the natural disaster in Japan and questions about investments made in European banks. Their investment portfolio is roughly $90 billion and most of that is outside the debt laden Euro banks. Aflac is now selling off or already have sold off much of their exposure to the troubled European countries for a loss. This has scared investors and has created an overblown sell off very similar to Neff’s situation in the 80s.
Key Ratios
Div: 3.5% (31% payout)
Div 5-year Growth Rate: 17.99%
Debt/Eq: 28.3
Fwd P/E: 5.4
P/FCF: 2.0
Valuation
Aflac is sitting on a 2-year low and sporting a P/E around 9. The five-year P/E stands at 15.6. P/B is at 1.35. Besides the drop in 2009 due to the U.S. subprime meltdown we are seeing some record low valuations.
Total Return Ratio
In honor of Neff I will use his Total Return Ratio (Annual Earnings Growth + Yield ÷ P/E Ratio). Analyst estimates have Aflac’s projected five-year earnings at 12% growth. As with all analyst estimates they are usually over optimistic. I’ll play it conservative and cut Aflac’s growth rate to 6%.
6% + 3.3% = 9.3% total return
9.3 Ă· 9 (P/E) = 1.032
Neff considered a total return ratio of .7 as a worthy investment for further research. Using the forward P/E of we get a TRR of 1.722.
Graham Number
I also applied the Graham Number; SQRT (22.5 * EPS * BVPS)
√ (22.5 * 3.81 * 25.37) = $46.64
I get $46.64 which has a Margin of Safety of 33.5%
Vitaliy Katsenelson’s Absolute P/E Model
This is a new favorite of mine. Generally, Vitaliy assigns expected earnings growth rates with a certain P/E. A no-growth stock is a P/E of 8 (Jae June and myself use a 7 P/E to be safe). Then you add the yield for the "basic P/E.” He assigns business risk, financial risk and earnings predictability with a premium or discount depending on the company (average is a 1). I’ll probably do the full breakdown in another post, but I won’t go into it here. The valuation is explained in great detail by Jae Jun from oldschoolvalue here.
This is the equation:
Fair Value PE = Basic PE x [1 + (1 - Business Risk)] x [1 + (1 - Financial Risk)] x [1 + (1 - Earnings Visibility)]
I assigned a 5% discount to business risk, financial and earnings visibility. I assigned earnings growth yet again with 6% opposed to analyst predictions of 12% growth.
Fair value came out to:
P/E: 12.7 FV: $46.39 MOS: 35.1%
@ 12% growth I get a FV of $59.13
Conclusion
I think John Neff would love this stock. On a value basis, a contrarian basis and fundamental basis I believe Aflac is worth investing in. I’m putting my money where my mouth is and have been investing near the lows. As is usually the case, the market has overreacted and they’re ignoring the prospects of this company. I’ll be waiting patiently with a 3.3% dividend for everyone else to recognize this as well.
Thanks for reading,
Kevin Holloway
Patience, perspective, valuation and conviction to go against the crowd.
I've been reading "John Neff on Investing" and came across a situation he encountered in the 80s with beaten down property and casualty insurance companies. Wall Street predicted that asbestos related problems were going to be a liability of approximately $500 billion. Wall Street overreacted and insurance stock prices moved downward significantly. Sounds familiar... Insurance stocks have been beaten down with many of the recent natural disasters in Japan and in the U.S., which have made for some real bargains.
"Instead of focusing on the fate of the insurance industry if costs reached the predicted magnitude, we wondered about the impact once overreactions melted away.” — Ness
Neff decided to buy Cigna at its lows w/ special consideration to the low P/E and well managed business. After the market realized the predictions were overblown Cigna's shares advanced 54% and property and casualty insurers advanced 45%. The S&P 500 gained 29%
AFLAC: (AFL, Financial)
One of my favorite stocks right now is Aflac (AFL). This stock has taken a beating over the last year dropping 32% from its highs w/ concerns of the natural disaster in Japan and questions about investments made in European banks. Their investment portfolio is roughly $90 billion and most of that is outside the debt laden Euro banks. Aflac is now selling off or already have sold off much of their exposure to the troubled European countries for a loss. This has scared investors and has created an overblown sell off very similar to Neff’s situation in the 80s.
Key Ratios
Div: 3.5% (31% payout)
Div 5-year Growth Rate: 17.99%
Debt/Eq: 28.3
Fwd P/E: 5.4
P/FCF: 2.0
Valuation
Aflac is sitting on a 2-year low and sporting a P/E around 9. The five-year P/E stands at 15.6. P/B is at 1.35. Besides the drop in 2009 due to the U.S. subprime meltdown we are seeing some record low valuations.
Total Return Ratio
In honor of Neff I will use his Total Return Ratio (Annual Earnings Growth + Yield ÷ P/E Ratio). Analyst estimates have Aflac’s projected five-year earnings at 12% growth. As with all analyst estimates they are usually over optimistic. I’ll play it conservative and cut Aflac’s growth rate to 6%.
6% + 3.3% = 9.3% total return
9.3 Ă· 9 (P/E) = 1.032
Neff considered a total return ratio of .7 as a worthy investment for further research. Using the forward P/E of we get a TRR of 1.722.
Graham Number
I also applied the Graham Number; SQRT (22.5 * EPS * BVPS)
√ (22.5 * 3.81 * 25.37) = $46.64
I get $46.64 which has a Margin of Safety of 33.5%
Vitaliy Katsenelson’s Absolute P/E Model
This is a new favorite of mine. Generally, Vitaliy assigns expected earnings growth rates with a certain P/E. A no-growth stock is a P/E of 8 (Jae June and myself use a 7 P/E to be safe). Then you add the yield for the "basic P/E.” He assigns business risk, financial risk and earnings predictability with a premium or discount depending on the company (average is a 1). I’ll probably do the full breakdown in another post, but I won’t go into it here. The valuation is explained in great detail by Jae Jun from oldschoolvalue here.
This is the equation:
Fair Value PE = Basic PE x [1 + (1 - Business Risk)] x [1 + (1 - Financial Risk)] x [1 + (1 - Earnings Visibility)]
I assigned a 5% discount to business risk, financial and earnings visibility. I assigned earnings growth yet again with 6% opposed to analyst predictions of 12% growth.
Fair value came out to:
P/E: 12.7 FV: $46.39 MOS: 35.1%
@ 12% growth I get a FV of $59.13
Conclusion
I think John Neff would love this stock. On a value basis, a contrarian basis and fundamental basis I believe Aflac is worth investing in. I’m putting my money where my mouth is and have been investing near the lows. As is usually the case, the market has overreacted and they’re ignoring the prospects of this company. I’ll be waiting patiently with a 3.3% dividend for everyone else to recognize this as well.
Thanks for reading,
Kevin Holloway
Patience, perspective, valuation and conviction to go against the crowd.
