Aon (AON) Stock Up 37.9% in a Year: Will the Rally Continue?

Aon plc AON has been buoying investors’ optimism on the back of a growing top line and strategic initiatives.

In the first quarter of 2019, the company delivered revenues of $3.1 million, up 1.7% year over year. Its operating earnings of $3.31 also improved 11.4% year over year on the back of solid revenue growth.

In a year’s time, this Zacks Rank #3 (Hold) company has surged 37.9%, outperforming the industry’s growth of 31.4%.

Its return on equity — a profitability measure — stands at 46.2%, higher than the industry's average of 25.7%.

The company’s long-term growth rate came in at 11.9%, which is a positive factor as it is above the industry's average of 10.9%.

We expect this uptrend to continue as it gains traction from the following factors:

Revenue Stream: Aon has witnessed a steady bottom-line improvement over the last many years on the back of its strong fundamentals, such as expansions through buyouts and collaborations, divestitures and a solid financial position. We expect the company's bottom line to further grow, driven by its core fundamentals, such as a strong capital position and strategic initiatives.

Strategic Endeavors: Acquisitions and partnerships form a key growth catalyst at Aon. The inorganic growth story looks impressive as the company has sealed a number of acquisitions over the past three years. The transactions mainly aim at expansion of the health and benefits business, flood insurance solutions, and risk and insurance solutions operations. Astute collaborations also boost Aon’s capacity and make it one of the largest insurance brokers. In 2017 and 2018, it completed a total of 17 and eight acquisitions, respectively, to enhance its capabilities. Notably, Aon’s peers, namely Marsh & McLennan MMC and Brown & Brown Inc. BRO, too follow the acquisition route to add stimulus to their core growth strategies.

Aon has also been divesting non-core to streamline its business. During the 2010-2015 period, it sold 27 businesses in all from the Risk Solutions segment and even shed seven from the HR Solutions segment that generated a substantial pre-tax gain. In the first quarter of 2019, the company detached one business for an insignificant amount. The sale of businesses not only appears profitable but should also help the company focus on its more lucrative operations, generating higher return on equity.

Restructuring Initiatives: Aon has also taken up a restructuring program, aimed at reducing workforce and rationalizing technology. The company intends to take up certain corrective measures in order enhance its operations. It spent a total of $1.1 billion on restructuring businesses and incurring related separation costs from the inception of its plan through Mar 31, 2019, which should further fuel growth.

The Zacks Consensus Estimate for current-year earnings is pegged at $19.14 on revenues of $11.25 billion, indicating an increase of 12% and 4.5%, respectively, from the year-ago reported figure.

For 2020, the Zacks Consensus Estimate for earnings stands at $10.30 on $11.91 billion revenues, implying a respective 12.7% and 5.9% improvement from the prior-year reported numbers.

Key Pick

Investors interested in the same space might take a look at a better-ranked stock like eHealth, Inc. EHTH. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

eHealth offers private health insurance exchange services to individuals, families and small businesses in the United States and China. The company currently carries a Zacks Rank #2 (Buy). It delivered a beat in three of the last four quarters, the average positive surprise being 127.73%.

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