Aon (AON) Down 3.9% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Aon (AON). Shares have lost about 3.9% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Aon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Aon’s Q2 Earnings Fall Short of Estimates, Improve Y/Y

Aon’s second-quarter 2019 operating earnings of $1.87 per share missed the Zacks Consensus Estimate of $1.88 by 0.5% due to poor performance by its Retirement Solutions segment. However, the metric improved 9.4% year over year, primarily backed by the company’s strong organic revenue growth, decreased expenses and an operating margin improvement.

Total revenues inched up 2% to $2.6 billion including 6% organic revenue growth. However, this uptick was partially offset by a 3% unfavorable impact from foreign currency translation along with 1% dip associated with divestitures, net of acquisitions.

Adjusted operating margin expanded 240 basis points to 24.4%.

Total operating expenses declined 15% to $2.2 billion, primarily owing to lower non-cash impairment charge, reduced legacy litigation costs, fall in restructuring costs and a favorable impact from the foreign currency translation, etc.

The adjusted effective tax rate on a comparable basis for the second quarter of 2019 was 18% compared with 14.7% in the prior-year quarter. This upside was primarily driven by a net unfavorable effect from discrete items.

Organic Revenue Catalysts    

Commercial Risk Solutions:Organic revenues rose 6% on the back of strong growth across every major geography including the United States, EMEA and the Pacific, boosted by new business opportunities as well as renewal book portfolio management. The segment’s total revenues of $1.1 billion were in line with the prior-year quarter’s figure.

Reinsurance Solutions:Organic revenues improved 12%, attributable to a constant net new business generation in treaty along with robust growth in facultative placements and capital market transactions. Moreover, the market impact was modestly favorable to second-quarter results. However, total revenues for the segment improved 11% year over year to $420 million.

Retirement Solutions: Organic revenues inched up 1% year over year, aided by growth in delegated investment management and rewards and assessment businesses within the Human Capital practice. This upside was countered by an adverse impact from certain businesses divested in the second quarter along with the timing of a few revenues in actuarial business and from the performance fees in the delegated investment management business.

Total revenues for the segment dipped 3% year over year to $419 million.

Health Solutions: Organic revenues were up 6% year over year, led by solid growth in health and benefits brokerage, especially bolstered by a sturdy uptrend in Asia and continental Europe plus upside in the active healthcare exchange business for off-cycle enrollments.

Total revenues for the segment climbed 3% to $317 million.

Data & Analytic Services: Organic revenues for this segment grew 4% year over year owing to prosperity in Affinity business, particularly in the United States across both business and consumer solutions. However, total revenues of the segment increased 3% to $286 million.

Financial Position

For the first half of 2019, the company’s cash flow from operations decreased 13% to $361 million while free cash flow decreased 16% to $255 million.

The company exited the second quarter with total assets of $29.8 billion, up 12.8% from the level on Dec 31, 2018.

As of Jun 30, 2019, long-term debt of the company stands at $6.7 billion, up 12.5% from 2018-end level.

Share Repurchase and Dividend Update

In the quarter under review, Aon bought back5.8 million Class A Ordinary Shares for a value of around $1.05 billion. It also hiked its quarterly cash dividend by 10%.

As of Jun 30, 2019, Aon had $2.8 billion remaining under its authorized share buyback plan.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Aon has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Aon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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