Monday, Credit Suisse upgraded Aflac Inc. (AFL) shares to Outperform from Neutral and increased its price target to $60 from $52.
Analyst Gallagher upgraded the stock after sizing up potential losses and recent actions to restructure European banks' capital positions. The analyst's upgrade also considers: improved recent fundamental trends, including an uptick in persistency and a wider gap between incurred claims and benefits paid; reserve redundancy averaging over 20% per year, which he believes may fully offset AFL's prospective credit losses; and a potential RBC arbitrage as a result of a continued rally in bank hybrid security prices relative to NAIC capital charges.
With the assistance of global credit research colleagues, the analyst builds a scenario analysis for what he perceives is AFL's most at-risk investments, totaling $12.7 billion dollars and representing the majority of AFL's unrealized losses.
The analyst determines that AFL owns $1.8 billion of securities at risk of coupon deferral, $2.3 billion at heightened risk of principal loss; he deem $6.9 billion to be money good and $1.1 billion to be at a low probability of mild loss. The analyst expects AFL to maintain an RBC ratio in excess of 400% in the coming year.
The analyst believes AFL can achieve its intermediate low-double-digit EPS growth target versus his low-to-mid single digit growth forecasts for its peers. AFL also has the least capital-intensive business among its peers. The analyst based his new price target of $60 on 11x his 2010 EPS estimate of $5.25, to reflect his forecast of ROE's just north of 25% and steady earnings growth.
Currently, AFL is up $1.39 or 3.18% and trading at $45.04.
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