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Will Strong U.S. Business Aid Aflac's (AFL) Q3 Earnings?

Zacks Equity Research

Aflac Inc.’s AFL third-quarter results, scheduled for Oct 25, are expected to benefit from increased revenues from its U.S. segment. This unit has been performing strongly as evident by increasing revenues since 2010 for the past many years, a trend that continued through the first half of 2017.

We expect the same to continue in the third quarter given a number of growth initiatives in this segment such as the adoption of Everwell for increased penetration, delivery of value-added services and increased client retention; product partnering to drive improved account values and employee access; and investment in administrative capabilities. The Zacks Consensus Estimate for revenues from this segment is $1.6 billion, which translates into year-over-year growth of 6.7%.

Aflac’s top line remains sufficiently exposed to a challenging operating environment, primarily in Japan. The persistent low interest rate environment has led the company to deemphasize sales of first-sector (life insurance) products in Japan.

The curtailment of these products has led to a decline in revenues by 0.3% in 2016 and 3% in first-half 2017.  The restriction on sale of first-sector products, which carry higher premiums, is further expected to suppress top-line growth in the region in the third quarter. The Zacks Consensus Estimate for revenues from this segment is pegged at $3.8 billion, which signifies a decline of 7.9% year over year.

The company is in the process of converting its Japan branch into a subsidiary. The conversion will enhance Aflac's business development flexibility. The company booked approximately $14 million in pretax costs associated with its Japan branch conversion in the first half of 2017. The conversion remains on track and the company expects to incur conversion costs of $120 million to $130 million pretax through mid-2018. These costs will hurt the company’s margins in the coming quarters.

Aflac derives almost 70% of total revenues from Japan, which exposes it to significant foreign currency volatility, which may hurt its margins.

However, the company’s continued efforts to return capital to its shareholders via share buyback will cushion its bottom line.

Here is what our quantitative model predicts:

Our proven model shows that Aflac has the right combination of the two key ingredients to beat earnings estimates.

Zacks ESP:  Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +1.31%. This is because the Most Accurate estimate of $1.65 is pegged higher than the Zacks Consensus Estimate of $1.62.

The positive ESP is a meaningful indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Aflac carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank of #1, 2 or 3 have a significantly higher chance of beating on earnings.

Aflac Incorporated Price and EPS Surprise

Aflac Incorporated Price and EPS Surprise | Aflac Incorporated Quote

Other Stocks Worth Considering

Here are some companies worth considering as our model shows that these possess the right combination of elements to beat estimates this quarter:  

Amerisafe Inc. AMSF will report third-quarter 2017 earnings results on Oct 25. The company has an Earnings ESP of +2.6% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Voya Financial, Inc. VOYA has an Earnings ESP of +4.5% with a Zacks Rank of 3. The company is expected to report third-quarter earnings results on Oct 31.

Moody’s Corp. MCO has an Earnings ESP of +4.6%. This Zacks #2 Ranked company is expected to report third-quarter earnings results on Nov 3.

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