### Aflac Inc's Market Misplacement, Discounted Cash Flow Analysis

Recs

### 5

To analyze AFL's intrinsic value I used a discounted Cash flow method that is relatively simple. Rather than calculating the specifics of growth(operating margin growth, growth of working capital,etc) I simply used a growth of free cash flow to cover all of these factors. This is a 10 year discounted cash flow, but I am using 2010 as my 1st year as I wanted it to be grounded in at least 1 year of what actually happened. To calculate the terminal value, I used the exit multiple method(multiply the final year's cash flows by a conservative multiple to find its 'perpetual' cash flows). All of these values were discounted to their present values.

In my Free Cash Flow Calculations I assumed that FCF=OCF-Capital Expenditures.

I found discount rate by calculating WACC. This yielded a surprisingly high discount of 25%. For the purposes of this analysis I will discount by 30%(5% margin of safety). I will also use the conservative idea that AFL will not grow(or lose) free cash flow at all in the next 9 years.

Cash Flows(in millions):

Year:Future Value:Present Value

2010: 6989: 6989

2011: 6989: 5376

2012: 6989: 4135

2013: 6989: 3181

2014: 6989: 2447

2015: 6989: 1882

2016: 6989: 1448

2017: 6989: 1114

2018: 6989: 856

2019: 6989: 659

SUM: 62,901: 28,088

Terminal Value: I calculated this by multiplying the final year of Future Value cash flows by an exit multiple(P/C,P/FCF/,EV/FCF,etc). and discounting it like its the 11th year. For this conservative calculation I used the P/S ratio of 1.04(it was the lowest ratio I could find) giving me a terminal value of 527.25(millions). This is less than 2019's cash flow because I discounted it an extra year.

To calculate Enterprise Value, I added the Sum of the PV Cash flows to the terminal value and subtracted total debt. This yielded an enterprise value of 26,000(millions). Divided by 470(million) shares, this yields an **intrinsic value of $54.75. This means that if Aflac didn't grow its FCF in the next 10 years, and its Beta INCREASED to 2.5, it is 17% undervalued.**

Back to reality! Assuming AFL grows cash flows by 2% per year for the next 10 years(its been growing them a lot more than that previously), using the discount value of 25%, and using the exit multiple of EV/FCF which makes a whole lot more sense, the intrinsic value of AFL was $76, *65% undervalued!*

Reasons? My immediate thinking goes to Japan and their lost money in Greece. However, as Jacob Roche said in this article: 11 Incredible Dividend Stocks: Aflac, "Aflac's stock has fallen 20% since the terrible earthquake and tsunami in Japan, where the company collects most of its revenue. While the damage was severe, Aflac and **Prudential** only cover health-care costs, unlike fellow Japan giant **MetLife** , which is on the hook for property damage as well. Additionally, only about 5% of Aflac's policyholders are in the worst-affected areas, and the company quickly issued a press release reiterating previous earnings guidance." I would worry about the money in greece but for Aflac's stellar management and the fact that AFL is still undervalued by 17% if they LOSE 2% of cash flows for the next 10 years....Thoughts?

Shamapant

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