Marsh & McLennan Companies
/ (MMC - NYSE) / $38.57Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 1Q13 Earnings Result
Prev. Ed.: News Update, Apr 19, 2013.
Flash Update (earnings update to follow)
On May 2, 2013, Marsh & McLennan announced its 1Q13 financial results. EPS of $0.73 comfortably surpassed the Zacks Consensus Estimate of $0.70 and the year-ago quarter earnings of $0.63.
Operating net income, which excludes one-time items in both the periods, increased 16.3% year over year to $406 million. On a reported basis, Marsh & McLennan recorded net income of $401 million or $0.72 per share in the reported quarter, up from $347 million or $0.63 per share in the prior-year quarter.
Marsh & McLennan posted improved results on account of modest revenue growth across its Risk and insurance business along with strict expense control, which also drove the operating margin. These were partially offset by weak revenue growth in Consulting segment and higher tax expense.
Consolidated revenues were $3.13 billion, climbing 2.5% year over year and 2% on an underlying basis. However, it missed the Zacks Consensus Estimate of $3.2 billion.
Meanwhile, total operating expenses dipped 0.2% year over year to $2.52 billion as compensation and benefits marginally rose 0.4% to $1.8 billion, while other expenses decreased 1.6% to $716 million. Additionally, adjusted operating margin improved to 17.4% from 19.7% in the year-ago period. Nevertheless, tax expenses escalated to $176 million against $153 million in the year-ago quarter.
Segment Results
Revenues for the Risk and Insurance Services segment were $1.8 billion, up 5% on a year-over-year basis. Moreover, adjusted operating income was up 14% year over year reaching $471 million, reflecting improved performance at Marsh and Guy Carpenter.
Marsh's revenues came in at $1.4 billion, up 5% year over year and 4% on an underlying basis, driven by strong new businesses and growth across geography in the quarter. Underlying revenue grew 5% in international operations reflecting 13% growth in Latin America, 6% in Asia Pacific and 3% in EMEA. Meanwhile, underlying revenue growth in the U.S.-Canada region stood at 2%.
Guy Carpenter's revenues during the reported quarter were $375 million, up 5% on year-over-year and 4% on underlying basis.
The Consulting segment's revenues dipped 1% on year-over-year and were flat on underlying basis at $1.4 billion. Additionally, adjusted operating income grew 15% year over year to $189 million.
Mercer's revenues stood at $1.0 billion, up 3% on both year over year and underlying basis. Mercer's retirement operations generated revenues of $343 million, down 1% on an underlying basis. Additionally, Health revenue grew 6% to $381 million, whereas revenues from Talent decreased 4% to $123 million. Revenue from Investments increased 9% to $194 million, on underlying basis.
Moreover, Oliver Wyman’s revenues decreased 9% on an underlying basis to $321 million in the reported quarter.
Financial Update
During the reported quarter, Marsh & McLennan total investment income, including private equity investments, grew to $21 million against $20 million in the year-ago quarter. Meanwhile, capital expenditure escalated to $126 million from $51 million in the year-ago period.
Marsh & McLennan exited the reported quarter with cash and cash equivalents of $1.26 billion, down from $2.3 billion in 2012. Long-term debt swelled to $2.71 billion from $2.66 billion at the end of 2012.
As of Mar 31, 2013, Marsh & McLennan’s total assets depreciated to $15.54 billion, while total shareholders’ equity increased to $6.71 billion from 2012-end.
Additionally, the company bought back 2.7 million shares for $100 million during the reported quarter, while $223 million worth of stock remains available for repurchases under the current authorization.
Dividend Update
On Mar 20, 2013, the board of Marsh & McLennan announced a quarterly common stock dividend of $0.23 a share, which is payable on May 15, 2013 to the shareholders of record as on Apr 10, 2013.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON MMC.
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]
Marsh & McLennan Companies (MMC) operates worldwide through its subsidiaries Marsh Inc., and Mercer Group. The company provides risk management services, insurance broking, reinsurance broking, and insurance program management via Marsh Inc., and consulting services through the Mercer Group and Oliver Wyman Group.
Almost 69.2% of the firms in the Digest group covering Marsh & McLennan had a positive outlook, while 30.8% of the firms rated the stock cautiously. None had a negative outlook. Of the 13 firms covering the stock, 11 brokers provided target price ranging from $38.00 (0.7% upside from the current price) to $45.00 (19.2% upside from the current price).
Positive outlook – 9/13 firms or 69.2%: The firms with a positive outlook are of the opinion that Marsh is well positioned to reap benefits from an improved commercial lines pricing environment. Moreover, it has a strong presence in fast growing economies. Due to faster GDP growth and lower insurance penetration in emerging markets, the company has an added advantage in terms of gaining market share.
The bullish firms are of the opinion that the company will remain focused on setting up exchanges and these exchanges will contribute toward margin expansion going forward. Towards this end, the company launched Mercer Marketplace, Marsh’s private active employee exchange. Mercer, going live at the end of 2013, is expected to add to the company’s earnings in the subsequent periods.
The company is also expected to continue its dividend payouts, share repurchases and acquisitions through free cash flow. Significant share repurchases are expected to enhance company earnings in 2013.
However competition from big and small names in the industry can increase the cost of retaining workforce and lead to a reduction in fees and commission earned. Moreover if the jobless recovery conditions and European sovereign debt market uncertainty prevails, the Mercer and Oliver-Wyman which depend on job creation and consumer spending will continue to perform poorly and bring down margins.
Neutral outlook – 4/13 firms or 30.8%: The neutral firms are of the opinion that Marsh and McLennan is on track to report an 11%–13% earnings growth. Nevertheless, the results of the last two quarters have made them skeptical regarding the pace of growth and thus they expect growth rate to be at the lower end of the range.
The firms expect business momentum to remain strong in 2013 though modest growth in the recent past can weigh on numbers in the near term. The business segments – Guy Carpenter, U.S. property and Casualty and Oliver Wyman are expected to report poor numbers in the first two quarters of 2013.
They believe that as organic growth slows down gradually by next year, investments will increase, particularly in the Mercer Group.
Although the company has plenty of cash on the balance sheet, an aggressive capital management program remains missing. The firms say that an acquisition or a significant share repurchase next year would bolster earnings at levels closer to 15% for the upcoming period.
Negative outlook – 0/13 firms or 0%
Apr 19, 2013
Overview [Note: Only highlighted material has been changed.]
Based in New York, Marsh & McLennan Companies Inc. is a global professional services firm providing advice and solutions in the areas of risk, strategy, and human capital. The company operates in two segments: Risk and Insurance Services, and Consulting.
Its Risk Consulting & Technology segment primarily consisted of Kroll operations, which has been sold to Altegrity, Inc, an international screening and security solutions company owned by global private equity firm Providence Equity Partners, at $1.13 billion during 2Q10. Marsh & McLennan stated that the sale of Kroll will allow the company to concentrate on its Risk and Insurance Services and Consulting businesses.
Marsh & McLennan is the parent company of a number of the world’s leading risk experts and specialty consultants, including Marsh, insurance broker and risk advisor; Guy Carpenter, risk and reinsurance specialist; Mercer, providers of HR and related financial advice and services; and Oliver Wyman, the management consultancy. With over 50,000 employees worldwide and annual revenue of approximately $10 billion, the company provides analysis, advice, and transactional capabilities to clients in more than 100 countries and is listed on the New York, Chicago, and London stock exchanges.
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative Arguments· The company has a fee-based (as against risk-based) revenue stream and the ability to internally fund its ordinary capital needs
· The company expects to grow the top line by expanding its operations worldwide
· Recovering economic conditions and improving insurance price is a positive for the company
· Operating performance across the company’s segments is improving / · Marsh & McLennan’s pricing cycle deteriorates more rapidly than expected, keeping its margins as well as growth under pressure
· The insurance market is soft and expenses could increase due to changes in the business model
· Visibility on the company’s earnings remains weak
· Competitive pressure in the commercial line insurance may have a negative effect on the company’s top-line.
Further information on Marsh & McLennan is available at its website: www.marshmac.com.
NOTE: The Company’s fiscal year references coincide with the calendar year.
Apr 19, 2013
Long-Term Growth [Note: Only highlighted material has been changed.]
Marsh and McLennan, being the largest insurance broker in the world, has an advantage of scale and can reap benefits from its market leading position. The firms favor Marsh’s leverage to the global economy, higher interest rates and stabilizing Property and Casualty rate environment and margin improvement.
Operations in over 100 countries insulate earnings at Marsh from a potential threat of a possibly weak economic recovery in Europe and United States. The company is also expected to focus more on its better performing markets of China, Middle East and Latin America. Moreover, Marsh and McLennan has two lines of operations– risk and insurance, and consulting. This diverse product offering allows the company with the opportunity of cross-selling and client penetration.
Marsh has also maintained its retention rates higher than 90% for some time which again bolsters cross selling and driving new business through referrals thereby allowing for easier internal growth.
The company is also focused in reducing its debt levels which is expected to continue in future.
Apr 19, 2013
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 69.2%↓
Neutral / 30.8%↑
Negative / 0%↓
Avg. Target Price / $40.82↑
Maximum Target / $45.00↑
Minimum Target / $38.00↑
No. of Analysts with Target price/Total / 11/13
According to the firms, risks to price target include softer insurance pricing, regulatory and legal risk, loss of key talent, equity market and interest rate risk, competitive market conditions, and global economic downturn.
Recent Events [Note: Only highlighted material has been changed.]
On Mar 20, 2013, the board of directors of Marsh & McLennan declared a quarterly dividend of $0.23 per share to be payable on May 15, 2013 to shareholders of record on Apr 10, 2013.
On Feb 13, 2013, Mercer, the wholly owned subsidiary of Marsh & McLennan, acquired the salary survey database, client relationships and consulting services of Hall Consulting Limited (HCL), a leading provider of expertise and information services for the mining sector in North America.
On Feb 12, 2013, Marsh & McLennan announced its 4Q12 and FY12 financial results. Operating EPS for 4Q12 stood at $0.52, in line with the Zacks Consensus Estimate but modestly higher than the year-ago quarter’s earnings of $0.46.
Marsh & McLennan posted improved results on account of modest underlying revenue growth and new business development across its businesses, which also drove the operating margin. The lower-than-expected operating and tax expense growth also supported the bottom line.
Consolidated revenues were $3.0 billion, climbing 3.2% year over year and 3% on an underlying basis. However, it fell short of the Zacks Consensus Estimate of $3.02 billion.
Full-Year 2012 Highlights
For full-year 2012, Marsh & McLennan’s operating earnings per share stood at $2.15, a penny lower than the Zacks Consensus Estimate. However, earnings were noticeably higher than $1.77 a share recorded in 2011.
Consolidated revenues were $11.92 billion, climbed 3.5% year over year and 4% on an underlying basis. However, it slightly lagged the Zacks Consensus Estimate of $11.94 billion.
Financial Update
During the reported quarter, Marsh & McLennan’s total investment loss, including mark-to-market gains in private equity investments, grew to $4 million against a loss of $4 million in the year-ago quarter. Meanwhile, capital expenditure escalated 14.3% year over year to $320 million in 2012, although it dipped 5.3% to $71 million during the reported quarter.
Marsh & McLennan exited 2012 with cash and cash equivalents of more than $2.3 billion, down from $2.1 billion in 2011. Long-term debt marginally declined to $2.66 billion from $2.67 billion at the end of 2011.
As of Dec 31, 2012, Marsh & McLennan’s total assets appreciated to $16.31 billion, while total shareholders’ equity increased to $6.61 billion from 2011-end.
Additionally, the company bought back 1.4 million shares for $50 million during the reported quarter, while $323 million worth of stock remains available for repurchases under the current authorization.
Dividend Update
On Feb 15, 2013, the board of Marsh & McLennan paid a quarterly dividend of $0.23 a share to the shareholders of record as on Jan 28, 2013.