We issued an updated research report on Aon plc AON on Apr 13, 2015.
As a risk consultant, the company provides alternative captive management vehicles that are unavailable in the traditional insurance markets to help its clients manage risks successfully. On the other hand, for insurance brokerage, Aon depends on dynamic financial analysis and securitization to enhance its capacities. This enables it to gain competitive advantage over other players in the industry, thereby making it one of the major insurance and risk brokers.
To further increase its operating strength, the company has been divesting non-core operations. In 2014, Aon divested two businesses in the Risk Solutions segment that led to a pre-tax gain.
Aon has been upfront in adopting inorganic growth strategies like acquisitions and partnerships. Among its latest endeavors is the acquisition of U.K.-based Kloud, the largest dedicated Workday consultancy outside the U.S., in Feb 2015. This deal should help Aon become the largest Workday services provider in Europe. On the other hand, the cost saving initiatives of the company positions it to witness margin expansion.
The company also has a sound financial position that not only supports it inorganic growth initiatives but also allows it to engage in capital deployments to enhance shareholders’ value.
However, Aon’s high financial leverage raises caution. A high 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 Co. WSH.
Further, as a global corporation, Aon is exposed to foreign currency fluctuations. Given the global economic volatility, foreign currency fluctuation is expected to persist for some time, thereby affecting earnings adversely.
The company has also been facing litigation issues that challenge its financial strength. Legal hassles not only drain cash, weighing on the financial position, but also tarnish the company’s goodwill and thus mar investor confidence.
Earlier, the company reported fourth-quarter earnings that beat the Zacks Consensus Estimate and also improved year over year on account of organic revenue growth, operating margin improvement across both the segments and efficient capital deployment.
Aon currently carries a Zacks Rank #3 (Hold). A better-ranked stock from the insurance brokerage space, Validus Holdings, Ltd. VR, holds a Zacks Rank #2 (Buy).
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