On Jan 8, 2015, we issued an updated research report on Aon plc (AON). The company’s strength lies in its core business strengthening initiatives, efficient capital deployments and cost savings generated from restructuring programs. However, increasing debt burden and competitive pressure raise concern.
Aon is a leading insurance and risk brokerage company globally. As a risk consultant, the company provides alternative captive management vehicles that are not available in the traditional insurance markets to help clients manage risks. On the other hand, for insurance brokerage, Aon depends on dynamic financial analysis and securitization to enhance its capacities. This helps it to gain competitive advantage over other players in the industry, thereby making it one of the major insurance and risk brokers. To enhance its core capacities as an insurance broker, the company has been resorting to divestitures. Further, the expansion of the coverage options under the Aon Active Health Exchange is expected to boost revenues. Also, the latest launch of the Aon Delegated DC Services for trust based defined contribution schemes is aimed at efficient investment and better member outcomes.
Aon has devised a number of restructuring plans that has helped it control mounting expenses and also generate savings. Annualized savings of $402 million are anticipated in 2014, of which $395 million was achieved from the Aon Hewitt restructuring program in the first nine months of 2014. Moreover, the company’s operating cash flow has been strong over the years. Although cash flow deteriorated in the first nine months of 2014, it was partially mitigated by strong underlying working capital performance and a decline in pension contribution. Nevertheless, the increased authorization in the share buyback program in Nov 2014 is reflective of its focus on efficient capital deployment.
On the flip side, Aon’s increased debt levels remain a matter of concern. High level of leverage increases the company’s borrowing costs and financial risk, thereby making additional borrowing expensive going forward.
Moreover, Aon faces competition from players with greater market share, more financial resources and stronger brand recognition. Its Risk Solutions business, in particular, is facing intense competition from industry giants like Marsh & McLennan Companies, Inc. (MMC) and Willis Group Holdings Public Limited Company (WSH). Further, as a global corporation, Aon is exposed to foreign currency fluctuations, which has an unfavorable impact on the operating earnings of the company. Moreover, litigation issues faced by the company are challenging its financial strength.
Aon reported third-quarter 2014 earnings that exceeded the Zacks Consensus Estimate and maintained the positive earnings surprise trend over the trailing four quarters with an average beat of 7.35%.
Aon currently carries a Zacks Rank #2 (Buy). Other stocks in the industry that look attractive at current levels include Marsh & McLennan and eHealth, Inc. (EHTH), both having the same Zacks Rank as Aon.
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