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Aon (AON) Up 11.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Aon (AON). Shares have added about 11.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Aon due for a pullback? 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 Q4 Earnings Beat Estimates, Revenues Up Y/Y

Aon reported fourth-quarter 2020 operating earnings of $2.62 per share, which outpaced the Zacks Consensus Estimate by 5.7%. Moreover, the bottom line climbed 4% year over year.

The company’s results benefited from higher revenues and lower operating costs.

Further, total revenues improved 3% year over year at $3 billion, which comprised organic revenue growth of 2%. The upside can primarily be attributed to improved performances at Reinsurance Solutions, Health Solutions and Commercial Risk Solutions. Meanwhile, the top line outpaced the consensus mark by 4.7%.

Operating margin expanded 580 basis points (bps) to 24%, while operating margin, adjusted for certain items, contracted 100 bps to 26.9%.
Total operating expenses in the fourth quarter declined 5% year over year to $2.3 billion attributable to reduced information technology costs, expenses related to premises, and general expenses plus depreciation of fixed assets.

Organic Revenue Catalysts

Commercial Risk Solutions: Organic revenues improved 4% year over year on the back of robust retention and management of the renewal book portfolio resulting in double-digit growth in Latin America and solid growth across the United States. Results also reflect robust growth in core P&C, improved transaction liability and construction in the United States. Notably, the segment reported a year-over-year rise of 3% in total revenues to $1.4 billion.

Reinsurance Solutions: Organic revenues improved 12% year over year, courtesy of double-digit growth across treaty stemming from higher facultative payments and persistent net new business generation on a worldwide basis. Moreover, total revenues for the segment improved 5% year over year to $197 million.

Retirement Solutions: Organic revenues dipped 2% year over year. The results were impacted by a decent fall in the more discretionary parts of Retirement and Investments, and reduced Human Capital for rewards services. Further, total revenues at the segment remained flat year over year.

Health Solutions: Organic revenues grew 2% year over year. The upside came on the back of core business growth courtesy of a growing healthcare exchange business, and solid retention and management of the renewal book portfolio in health and benefits brokerage. Further, revenues from this segment advanced 5% year over year to $613 million.

Data & Analytic Services: Organic revenues fell 8% year over year due to reduction in travel and events practice globally. Revenues decreased 1% year over year to $288 million.

Financial Position

The company exited the fourth quarter with cash and cash equivalents of $884 million, which improved 11.9% from the level at 2019 end. As of Dec 31, 2020, Aon had total assets worth $32.1 billion, up 9.2% from the level on Dec 31, 2019.

As of Dec 31, 2020, long-term debt stands at $7.3 billion, which increased 9.9% from the level at 2019 end.

Share Repurchase Update

The company bought back 3.9 million Class A Ordinary shares for around $800 million in the quarter under review. In November 2020, its board of directors authorized a new share buyback program worth $5 billion. As of Dec 31, 2020, the company had around $5.3 billion left under its share repurchase program.

Full-Year Update

For 2020, the company’s adjusted EPS jumped 7% to $9.81 from the prior year. Also, total revenues remained flat at $11.1 billion including 1% organic revenue growth.

During 2020, the company’s cash flow from operations surged 52% from the level in 2019 to $2.8 billion.

Moreover, the company’s free cash flow of $2.6 billion surged 64% last year from the figure in 2019, which was the highest in the company’s history according to management. This upside can be attributed to higher cash flow from operations and lower capital expenditures. During 2020, the company bought back 8.5 million Class A Ordinary Shares for around $1.8 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Aon has an average Growth Score of C, a grade with the same score on the momentum front. 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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