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Aon (AON) Down 5.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Aon (AON). Shares have lost about 5.3% 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 the most recent earnings report in order to get a better handle on the important drivers.

Aon's Earnings Surpass Estimates in Q4, Improve Y/Y

Aon plc’s fourth-quarter 2019 operating earnings of $2.53 per share beat the Zacks Consensus Estimate by 1.6%, primarily backed by higher revenues and strong segmental contributions. Moreover, the metric increased 17.1% year over year.

Total revenues increased 4% to $2.9 billion including 7% organic revenue growth. However, the metric’s uptick was partially offset by a 1% unfavorable impact from adverse foreign currency translation along with 2% dip associated with divestitures, net of acquisitions.

Operating margin grew 20 bps to 18.2% and operating margin, adjusted for certain items, expanded 210 basis points to 27.9%.

Total operating expenses were up 4% to $2.4 billion, primarily due to a rise in costs related to organic revenue growth, increase in investments, higher restructuring charges.

The adjusted effective tax rate on a comparable basis for the fourth quarter was 15.7% compared with 16.5% in the prior-year period. This contraction was primarily aided by changes in geographical distribution of income and a net unfavorable impact from discrete items.

Organic Revenue Catalysts

Commercial Risk Solutions: Organic revenues rose 7% on the back of strong growth across every major geography, highlighted by double-digit growth in the United States and Latin America, new businesses and management of the renewal book portfolio. The segment witnessed a 5% increase in total revenues year over year to $1.3 billion.

Reinsurance Solutions: Organic revenues improved 17%, driven by double-digit growth in all major businesses, new business generation along with solid growth in catastrophe bonds within capital markets transactions. Moreover, total revenues for the segment increased 15% year over year.

Retirement Solutions: Organic revenues rose 3% year over year, contributed by sturdy growth in every major business, attributable to growth in its rewards and assessment businesses within the Human Capital practice along with significant growth in delegated investment management. However, total revenues dipped 3% year over year.

Health Solutions: Organic revenues were up 5% year over year, led by solid international growth in health and benefits brokerage, especially boosted by a robust uptrend in the United States market coupled with new business generation and double-digit growth in voluntary benefits along with a specific area of consistent investments on the back of buoyant client demand.

Data & Analytic Services: Organic revenues grew 6% year over year owing to international prosperity in Affinity business, particularly in the United States. Results also reflect strength in the Aon Inpoint and ReView businesses, supported by strong retention.

Financial Position

At the end of the quarter, the company’s cash flow from operations increased 9% to $1.8 billion and free cash flow rose 11% to $1.6 billion.

The company exited the fourth quarter with total assets worth $29.4 billion, up 11.3% from the level on Dec 31, 2018.

As of Dec 31, 2019, long-term debt stands at $6.6 billion, deteriorating 10.6% year over year.

Share Repurchase and Dividend Update

The company bought back 2.3 million Class A Ordinary shares for nearly $450 million in the quarter under review. As of Dec 31, 2019, it had stock worth $2 billion left under its share repurchase program.

Full-Year Highlights

For 2019, the company’s adjusted EPS jumped 12% to $9.17. Also, total revenues inched up 2% to $11 billion including 6% organic revenue growth.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Aon has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 C. 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 these revisions indicates a downward shift. Notably, Aon has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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