Expansion in North American Market and Robust Growth Prospects Drive Future Success

What are the underlying business or industry changes driving this perspective?

• Aon is a professional services firm, provides a range of risk and human capital solutions worldwide.
• The acquisition of NFP provides a significant expansion in the fast-growing $31 billion North American middle market, which can drive substantial top-line growth through enhanced client relationships and capabilities.
• The NFP acquisition is expected to add $300 million to free cash flow in 2025 and $600 million in 2026, reflecting early realization of financial benefits.
• Aon's restructuring program, including Aon Business Services, is expected to deliver $100 million in savings in 2024, which will contribute to margin expansion.
• The integration of NFP allows Aon to leverage its global network and superior analytics to enhance NFP's offerings, which can lead to improved client solutions and increased revenue visibility.
• Continued investment in analytics and client-facing areas, as well as efficiencies from Aon Business Services, is expected to drive long-term top and bottom line growth and double-digit free cash flow growth.

How have these above catalysts been quantified?

• Analysts are assuming Aon's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.0% today to 22.0% in 3 years time.
• Analysts expect earnings to reach $4.1 billion (and earnings per share of $20.33) by about May 2027, up from $2.6 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 18.3x on those 2027 earnings, down from 24.2x today. This future PE is greater than the current PE for the US Insurance industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 2.23% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• The retirement of CFO Christa Davies and the ongoing transition could lead to uncertainties and affect financial stability and decision-making, potentially impacting earnings.
• Integration risks associated with the acquisition of NFP, including potential challenges in achieving stated synergies and operational efficiencies, which could impact net margins and profitability.
• Short-term dilutive impact of the NFP acquisition on EPS in 2024, with breakeven expected in 2025 and accretion in 2026, creating potential short-term earnings volatility.
• Exposure to economic conditions affecting transaction and IPO activity, which remain depressed, could limit revenue growth from these areas.
• Elevated debt levels due to the NFP acquisition financing may increase interest expenses and affect free cash flow generation in the near term before leverage ratios are optimized.

• The analysts have a consensus price target of $324.69 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 $413.0, and the most bearish reporting a price target of just $289.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.7 billion, earnings will come to $4.1 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $287.79, the analyst's price target of $324.69 is 11.4% higher.
  
• 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.