MKM Partners Downgrades Aon Plc In Lieu Of Flat Guidance From Management

MKM Partners downgraded Aon plc Class A Ordinary Shares (UK) AON to Neutral from Buy as shares are approaching its latest price target.

Aon shares are up about 20 percent year-to-date against about 7.6 percent for the S&P 500. Aon now trades at about 17x trailing earnings, a multiple that it hasn't topped in recent memory.

"We normally do not like to change ratings on just valuation, but we do so here as we cannot envision a fundamental outlook that can be stronger than what it has seen over the past several years," analyst Harry Fong wrote in a note.

In addition, the analyst said Aon will be "challenged" to find new sources of revenue to offset the negative impact of continued pricing pressure in the insurance broking space.

Further, in the HR solutions business, the outlook for the private exchange business is being pushed out as the "Cadillac" tax under Obamacare is pushed out to 2020 from 2018.

For the second quarter, Aon reported adjusted net income of $1.39, slightly ahead of both MKM and consensus estimates. Despite tough pricing environment especially in property casualty reinsurance space, Aon found new markets to grow to offset shrinkage in its more traditional sources of business.

The brokerage said the company has been developing its U.S. mortgage credit risk business, life and annuity, and other emerging risk businesses.

Aon didn't change its full year outlook despite warning that seasonal weakness in risk solutions for third quarter will be more pronounced this year. However, it expects to recover the shortfall in the fourth quarter.

"We continue to like the fundamental outlook of Aon, but we are trimming our earnings estimates modestly for both 2016 and 2017 to reflect a slightly higher level of conservatism in our numbers following the company's second quarter earnings," Fong added.

Fong cut his 2016 EPS estimate to $6.55 from $6.60, and 2017 number to $7.15 from $7.30.

The analyst has a price target of $115.