Innovative Strategies And Acquisitions Drive Revenue And Margin Growth While Mitigating Market Challenges

Key Takeaways

• Aon's 3x3 Plan and strategic hiring aim to drive organic revenue growth, margin expansion, and net new business growth in priority sectors.
  
• Investments in advanced analytics and the successful integration of NFP are set to enhance client solutions, efficiency, and long-term earnings growth.
  
• Increased claims from natural disasters, interest rate volatility, and competition may challenge Aon's profitability and financial flexibility.

Catalysts

A professional services firm, provides a range of risk and human capital solutions worldwide.

• Aon's 3x3 Plan, which focuses on Risk Capital, Human Capital, and Aon Business Services, is designed to unlock new integrated solutions and support client needs. This is expected to contribute to consistent organic revenue growth and margin expansion.
  
• The acquisition of NFP is performing in line with expectations, with strong organic revenue growth and synergies, contributing to cost efficiencies and free cash flow. This should positively impact margins and earnings.
  
• Aon's investments in advanced analytics tools (e.g., CyQu and Health Efficiency Analyzer) are expected to enhance client solutions and attract new business, supporting both revenue growth and potential margin improvements.
  
• The strategic hiring of specialty talent and the integration of NFP are anticipated to drive net new business growth, particularly in priority areas like construction, energy, and health, which should bolster revenue.
  
• Aon's commitment to returning capital to shareholders through share buybacks, combined with deleveraging and a focus on disciplined capital management, is likely to support earnings per share growth over the long term.

Aon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aon's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.3% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $4.0 billion (and earnings per share of $19.88) by about November 2027, up from $2.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2027 earnings, down from 34.4x today. This future PE is greater than the current PE for the US Insurance industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 2.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Aon Future Earnings Per Share Growth

Risks

• The impact of recent natural disasters such as hurricanes could increase claims and liabilities, potentially affecting Aon's earnings and profit margins.
  
• Aon's reliance on fiduciary investment income, which may decline if interest rates decrease, could negatively impact their operating margins and overall profitability.
  
• Regulatory changes and tax policy fluctuations across geographies may pose challenges and increase expenses, potentially impacting net margins and earnings.
  
• High competition in the reinsurance and brokerage markets may limit pricing power, affecting Aon's ability to grow revenues and maintain profit margins.
  
• Aon's debt levels, elevated due to acquisitions like NFP, could constrain financial flexibility and increase interest expenses, impacting net margins and cash flow.

Valuation

• The analysts have a consensus price target of $383.0 for Aon based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $432.0, and the most bearish reporting a price target of just $313.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.9 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $386.92, the analyst's price target of $383.0 is 1.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.