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