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AON Jumps 42.3% in Past Year: More Growth On the Horizon?

AON is poised for long-term growth on the back of core business strengthening initiatives, inorganic growth strategies and a strong bottom line.

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This story originally appeared on Zacks

Aon plc’s AON shares have jumped 42.3% in the past year compared with the 27.4% increase of the industry, thanks to greater exposure, faster economic recovery and strong results from operating segments. The company has not only managed to navigate through last year’s coronavirus-induced market volatility but also positioned itself for better returns in the future.

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Headquartered in Dublin, Ireland, Aon provides risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services worldwide. It has a market cap of $65.4 billion and operates in more than 120 countries.

Can It Retain Momentum?

The answer is yes and before we get into the details, let us show you how its estimates for 2021 stand. The Zacks Consensus Estimate for 2021 earnings per share currently stands at $11.63, signaling an 18.6% year-over-year increase. AON beat earnings estimates in each of the last four quarters, with an average of 10.8%. The Zacks Consensus Estimate for 2021 revenues is pegged at $12.3 billion, indicating an 11.3% year-over-year rise.

Now let’s delve into what’s driving the Zacks Rank #3 (Hold) stock.

Aon is poised for long-term growth on the back core business strengthening initiatives, inorganic growth strategies and a strong bottom line. It has witnessed a steady bottom-line improvement over the last several years on the back of strategic cost-curbing measures. In the first nine months of 2021, the bottom line climbed 12.5% year over year. We expect the company's bottom line to continue performing well in the near term, aided by core fundamentals such as a strong capital position and strategic initiatives.

Acquisitions and partnerships comprise one of the main inorganic growth strategies of Aon and the company has carried out a number of deals over the past three years. Its buyouts are mainly aimed at the expansion of the health and benefits business, flood insurance solutions, and risk and insurance solutions operations. Strategic collaborations boost Aon’s capacity and make it one of the largest insurance brokers.

Management does not shy away from getting rid of less profitable assets to boost margins. AON has been divesting non-core operations to streamline its business. In the first nine months of 2021, AON completed three dispositions. The sale of businesses streamlined the company’s operations, allowing it to focus on more profitable operations and generate a higher return on equity. AON’s trailing 12-month return on equity (ROE) of 67.5% compares favorably with the industry's ROE of 28.9%, reflecting the company’s efficiency in utilizing shareholders’ funds.

AON resumed the share buyback plan in third-quarter 2020, which is attractive to investors. The company will continue to repurchase shares while maintaining higher-than-normal cash level for the near future. It had $3.7 billion remaining under the authorized share repurchase program as of Sep 30, 2021.

Risks

Despite the upside potential, there are a few factors that are impeding the stock’s growth lately. Long-term debt has been continuously increasing since 2014 due to an increase in commercial paper outstanding. As of Sep 30, 2021, it had cash and cash equivalents of only $0.6 billion, much lower than its long-term debt of $8.3 billion. AON’s solvency position continues to be bothersome. Also, rising operating costs are a concern. Nevertheless, we believe that a systematic and strategic plan of action will drive long-term growth.

Key Picks in Finance

Some better-ranked players in the Finance space include Ryan Specialty Group Holdings, Inc. RYAN, Brown & Brown, Inc. BRO, and Houlihan Lokey, Inc. HLI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Based in Chicago, IL, Ryan Specialty provides numerous specialty products and solutions for insurance brokers, agents, and others. It acts as a wholesale broker and managing underwriter to provide risk management services. Ryan Specialty’s bottom line for the next year is expected to jump 12.6% year over year to $1.21 per share. RYAN has witnessed two upward estimate revisions in the past 60 days and no movement in the opposite direction.

Headquartered in Daytona Beach, FL, Brown & Brown boasts impressive growth driven by organic means and a prudent inorganic story. Its strategic efforts continue to drive commission and fees, and sturdy performance is boosting cash flows. Brown & Brown’s 2022 earnings per share are expected to rise 5.1% year over year to $2.27. It has witnessed one upward estimate revision in the past 30 days compared with none in the opposite direction. BRO beat earnings estimates in each of the last four quarters, with an average of 18.3%.

Houlihan Lokey — headquartered in Los Angeles, CA — provides multiple financial services to clients all over the world. Its growing footprint in Europe and Asia’s investment banking services field will help HLI boost strategic and shareholder value in the coming days. Rising average transaction fees will help HLI increase corporate finance revenues. The full-year 2022 bottom line of Houlihan Lokey is expected to rise 37.7% year over year to $6.36 per share. In the past 60 days, it has witnessed two upward estimate revisions and no downward movement. HLI beat earnings estimates in all the last four quarters, with an average of 39.5%.



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