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Will Depressed Revenues Mar Aflac (AFL) Q2 Earnings Potential?

Aflac Inc. AFL is slated to report second-quarter 2020 results on Jul 28, after market close. The company delivered an earnings surprise of 9.01% in the last reported quarter.

Let’s see how things have shaped up for this announcement.

In Japan, total sales are likely to have declined from the impact of ramped-down activity due to COVID-19 and a year-over-year comparison, as Japan Post delivered an impressive performance in 2019.  Also, the company's face-to-face sales might have posed a challenge in the June quarter. Notably, it continues to actively generate business with focus on direct mail and calling campaigns to its existing and prospective customers. In addition, it is promoting digital and web-based sales to groups.

Despite the aforementioned efforts, overall sales are likely to have dwindled as JPI and JPC (collectively accounting for approximately 25% of Aflac Japan’s third-sector sales in 2019), each being an affiliate of Japan Post Holdings, were found guilty of conducting business malpractices and were put on three-month suspension (starting Dec 27, 2019) from selling insurance products. The investigation on the units’ malpractices is still underway and was likely to be completed by June 2020-end.

Consequently, there appears a cloud of uncertainty around the re-initiation of sales of JPI insurance products. Management believes that the sales of Aflac Japan cancer insurance through JPC and JPI are unlikely to return to the 2018-levels in the near term. For 2020, the company expects a decline in earned premium within the 0.7% range in the third sector and first-sector protection  products. The second-quarter earnings figures from Japan are thus likely to remain subdued. The Zacks Consensus Estimate for revenues from the Japan business is pegged at $3.7 billion, indicating a downside of 2.2% from the year-ago reported number.

The company is also expected to have incurred COVID-19-related claims. In April alone, it paid out approximately ¥8 million as pandemic claims in its Japan business. Further, the company is likely to have endured expenses on going paperless in its policyholder services operation.

Since the company’s production model in the United States relies heavily on face-to-face agent interaction at the work site and that it is small-business oriented, the company is likely to have been hit hard by the temporary closures of its businesses and a lack of access to the workplaces.

In April, sales in the U.S. segment slumped in the range of 55% and the whole of second quarter is likely to have seen muted sales. In April, the U.S. segment paid out of $1 million as COVID-19 related claims. The Zacks Consensus Estimate for revenues from the U.S. business is pegged at $1.63 billion, suggesting a 0.3% rise from the year-ago reported figure.

The benign  interest rate environment is likely to have been a headwind to net investment income. In terms of the company’s alternative investment portfolio consisting of the private equity and real-estate equity, it might have experienced lower returns in the second quarter.

Moreover, the company is expected to have incurred costs in its U.S. dollar hedging.  

Aflac is also likely to have borne increased interest expense due to its recent global yen and U. S. dollar debt issuances of approximately $1.54 billion .

Earnings & Revenue Expectations    

The Zacks Consensus Estimate for Aflac’s second-quarter earnings of $4.32 per share implies a 2.7% dip from the prior-year reported number. Likewise, the consensus estimate for sales of $21.51 billion suggests a 3.58% slip from the year-ago reported figure.

Earnings Surprise History

The company boasts an attractive earnings surprise history, having surpassed estimates in each of the last four quarters, the average being 6.25%. This is depicted in the chart below:

Aflac Incorporated Price and EPS Surprise Aflac Incorporated Price and EPS Surprise

Aflac Incorporated price-eps-surprise | Aflac Incorporated Quote

Here is what our quantitative model predicts:

Our proven model predicts a beat for Aflac this earnings season. The combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — increases the odds of a positive earnings surprise.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Aflac has an Earnings ESP of +4.85%.

Zacks Rank: Aflac currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Some insurance stocks with the right combination of elements to beat on earnings this time around are:

American Financial Group AFG has an Earnings ESP of +21.45% and a Zacks Rank #2, currently.

Selective Insurance Group SIGI has an Earnings ESP of +12.14% and a Zacks Rank #3 at present.

Allstate Corporation ALL has an Earnings ESP of +11.10% and a Zacks Rank of 3, presently.

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