Balanced View on Aon - Analyst Blog

On Jun 20, 2014, we issued an updated research report on Aon plc AON. We believe that the company's focus to boost core operations and inorganic growth, along with a strong cash flow poise to generate long-term growth. However, foreign currency fluctuations, heightened competition and the present legal hassles could pose as headwinds.

Earlier, the company reported first-quarter 2014 earnings that surpassed the Zacks Consensus Estimate and increased year over year on strong operating performance by the Risk Solutions business and efficient capital management.

This Zacks Rank #2 (Buy) stock is renowned name in the risk management and insurance brokerage space. The company has also been growing across emerging markets, particularly in Asia and continental Europe, where Aon is delivering strong results. Aon's divestiture of its non-core operations is helping it to enhance core operations and reap benefits from the same. In the first quarter, the company divested a business that led to a pre-tax gain of $1 million. Apart from divestitures, Aon remains focused on growing inorganically through its M&A activities. In the first quarter, the company closed the acquisition of one business each in the Risk Solutions and HR Solutions segments. Additionally, the pending acquisition of National Flood Services, and the collaboration with HelloWallet and Visier complements Aon Hewitt's extensive suite of solutions, thus increasing clientele and revenues going forward.

Aon's restructuring plans are helping the company to control mounting expenses and generate savings. The Aon Hewitt restructuring program generated $100 million worth of savings in the first quarter and is anticipated to save $402 million for 2014. As a result, operating expenses declined in the first quarter. The company also generates strong cash flow that helps it to implement efficient capital deployment strategies that boost shareholders' confidence in the stock. This is evident from the 43% dividend hike in 2014 and the record amount of share repurchases made in the last reported quarter.

On the flip side, Aon's increased debt burden raises concern. High level of leverage increases the borrowing costs and financial risk of the company, while making additional borrowing expensive in the future. Further, as a global corporation, Aon is exposed to foreign currency fluctuations. Given the global economic volatility, operating earnings is likely to be affected adversely by foreign currency fluctuations going forward.

Moreover, Aon has been facing litigation issues that challenge its financial strength. Additionally, the global economic weakness, re-pricing of credit risk and deterioration of the financial markets are weighing on customers' demand for the retail and reinsurance brokerage products of the company, which may affect operational results adversely.

Other Stocks to Consider

Other players in the insurance brokerage space that look attractive at current levels include Blue Capital Reinsurance Holdings Ltd. BCRH, Cninsure Inc. CISG and Erie Indemnity Company ERIE. All three stocks carry the same Zacks Rank as Aon.