Barclays Bullish On Marsh & McLennan's Mercer Unit

Barclays expects Marsh & McLennan Companies, Inc. MMC consulting unit Mercer to deliver increased earnings and margins, while reaffirming its Overweight rating and $71 price target on the stock.

Mercer is a $4.3 billion consulting business representing one-third of the total company revenue with a focus on health, retirement, talent and outsourcing, and investments. Mercer has delivered consistent positive organic revenue growth (70 percent of revenues are recurring, and 30 percent are project-based).

"Our sense is the investment consulting unit as well as health and benefits businesses generate among the highest margins for Mercer. We project MMC's Consulting segment (70% of which is Mercer) pre-tax margin could improve to 19% in FY17, up from 17% in FY15. Each 1-point improvement in margin is 8c/share annually," analyst Jay Gelb wrote in a note.

Gelb noted Mercer's growth areas include investment management consulting, private health exchanges, and developing markets. In addition, Mercer offers significant opportunities for global expansion despite sluggish growth in global markets.

The analyst expects the loss making exchange business to eventually deliver attractive earnings. Gelb highlighted that the exchange has generated 9 percent savings for members in the first year and slows the ongoing growth rate in member expenses to 1.6 percent, down from 5 percent.

Gelb said Marsh & McLennan has the "best potential among the insurance brokers to grow organically, expand margins, and generate double-digit earnings growth, in our view."