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Why Should You Retain Marsh & McLennan in Your Portfolio?

Zacks Equity Research

Estimates for Marsh & McLennan Companies, Inc.’s MMC 2019 and 2020 earnings have been revised upward over the past 30 days, reflecting analysts' optimism on the stock. The stock has seen the Zacks Consensus Estimate for both years move 0.6% north.

The company flaunts an encouraging earnings surprise history, having outpaced the Zacks Consensus Estimate in three of the trailing four reported quarters, the average beat being 3.77%. This trend of consecutive estimate beats underlines the company’s operating efficiency.

The company is well-poised for growth, evident from its favorable VGM Score of B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.  

Its return on equity — a profitability measure — is 28.8%, better than the industry average of 24.7%. Further, the metric reflects the company’s effectiveness in utilizing its shareholders’ money.

Marsh & McLennan recently delivered fourth-quarter adjusted earnings per share of $1.09, surpassing the Zacks Consensus Estimate by 5.8%. Also, the bottom line improved 3.8% year over year owing to rising revenues.

The company’s operating performance has been favorable for the past many years, driven by its diverse product offerings, a wide geographic footprint and strong client retention. Its revenues have been increasing consistently since 2010 (except in 2015). In 2018, the company’s top line rose 6.6% year over year, led by robust segmental growth. Given the company’s strategic initiatives to expand its portfolio, we expect revenues to grow going forward.

Acquisitions form one of Marsh and McLennan’s core growth strategies. The company has made numerous purchases within its different operating units that have enabled it to enter new geographies, expand within the existing ones, foray into fresh businesses, develop new segments and specialize within its current businesses. In 2018, the company successfully completed significant buyouts, such as Pavilion Financial Corporation, Summit Strategies Group, Otis-Magie Insurance Agency, Klein Agency and Insurance Associates, Houston-based Wortham Insurance plus Eustis Insurance & Benefits. It is all set to buy JLT Specialty, which is expected to close during the spring of 2019.

The company’s sturdy financial position, backed by a solid balance sheet and a consistent cash flow also impresses. Its disciplined capital management through share buyback and dividend payments has cemented investors’ confidence in the stock. The company has been repurchasing shares over the last 25 consecutive quarters.

However, we are concerned about its net investment income. In 2016, the metric was less than $1 million compared with $38 million in 2015. For 2017, the same has slightly improved to $15 million. Following the liquidation of Trident III (in 2015), the company now has a much smaller private equity portfolio. As a result, contribution to the top line from investment income remained nominal in 2017. In 2018, the company incurred a net investment loss of $12 million against its net investment income of $15 million in 2017. Declining investment income might pressurize top line growth.

Marsh & McLennan’s operating expenses escalated over the last several years due to higher compensation and benefits. The same further increased 7.2% during 2018 on account of rise in compensation and benefits plus other operating expenses. A persistent increase in expenses might weigh on the company’s margins.
The Zacks Consensus Estimate for current-year earnings per share is pegged at $4.69, representing a year-over-year improvement of 7.8% on 14.9% higher revenues of $17.2 billion.

For 2020, the Zacks Consensus Estimate for earnings stands at $5.10 on $18.6 billion revenues, translating into respective 8.7% and 8.3% year-over-year growth.

The expected long-term earnings growth rate is 11.9%, above the industry’s average of 11.2%, which is an upside for the company.

Shares of this Zacks Rank #3 (Hold) company have rallied 10.2% in a year's time, underperforming its industry's rise of 14.5%.

Stocks to Consider

Investors interested in the insurance industry might look into some better-ranked stocks like The Berkshire Hathaway Inc. BRK.B, MGIC Investment Corporation MTG and The Allstate Corporation ALL. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Berkshire Hathaway engages in insurance, freight rail transportation and utility businesses. The company carries a Zacks Rank #2 (Buy) and delivered a beat in three of the last four reported quarters, the average positive surprise being 4.31%.

MGIC Investment Corporation offers private mortgage insurance and ancillary services to lenders and government sponsored entities. It has a Zacks Rank of 2 and pulled off average trailing four-quarter earnings surprise of 22.88%.

Allstate Corporation offers property and casualty, and other insurance products in the United States and Canada. The company is a Zacks #2 Ranked player and came up with average four-quarter positive surprise of 14.48%.

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