Last week, Marsh & McLennan Cos. witnessed a rating upgrade from Standard & Poor's Ratings Services (S&P), which reflected the company’s steady operating growth based on a strong business and risk profile.
Accordingly, S&P elevated its senior unsecured debt rating on Marsh & McLennan by a nick to “BBB” from “BBB-”. Additionally, the company’s short-term rating was raised to “A-2” from “A-3”. All the ratings bear a stable outlook, indicating Marsh & McLennan’s credibility in the upcoming quarters as well.
Over the past three years, Marsh & McLennan has shown a steady and modest improvement in its organic and inorganic growth, thereby sailing through the recent economic turmoil fairly well. The company remained resilient through new acquisitions that brought in new businesses, diversified its product portfolio and expanded market share. Simultaneously, the company has also been retaining existing clients with its high-standard products and services.
Meanwhile, the stabilization of rates in the insurance industry provided the much needed cushion to Marsh & McLennan pricing, thereby enhancing the financial results. Moreover, the company streamlined its operations not only through meaningful acquisitions but also through strategic asset divestitures like that of its Kroll and Putnam units in 2010. On the other hand, controlled litigation charges in the past few quarters have helped the company augment its margins and bottom line.
Subsequently, the persistent business building efforts have led Marsh & McLennan’s top line to grow organically by 6% in the first half of 2012, which is backed by a 5% growth in 2011. Alongside, its cost control measures have improved its operating income to $1.0 billion from $1.6 billion in 2011 and $939 million in 2010.
Moreover, consistent reduction in debt obligations have led its debt-to-EBITDA to improve to 2.5x at the end of June 2012 from 3.4x at 2010-end, while the EBITDA fixed-charge coverage escalated from 4.2x in 2010 to 7.7x at the end of June 2012. A healthy liquidity position and debt maturity calendar also eliminate any significant risk on the financial leverage and capital of the company.
Consequently, S&P opines that Marsh & McLennan holds a dominant competitive position, quite next to arch-rival Aon Corp. , across its risk and insurance and consulting segments based on its enhanced operating leverage. While sluggish macro-economic factors and antitrust litigation charges could act as growth dampeners, the ratings agency believes that the company has a strong potential to outperform its peers in the future, banking on its size, diverse product offering, global presence and technical expertise.
As a result, S&P projects organic growth of low- to mid-single digit for 2012 and 2013, while EBITDA margins are anticipated to be sustained around 20% excluding any litigation or restructuring charges. Additionally, debt-to-EBITDA is expected to be below 3x coupled with EBITDA fixed-charge coverage of over 5x in the upcoming quarters.
Marsh & McLennan is expected to release its third quarter earnings by the end of this month. The Zacks Consensus Estimate currently pegs the third quarter earnings at 38 cents per share, projecting about 57% year over year escalation. For 2012, earnings are supposed to grow about 22% over 2011 to $2.14 a share.
The company carries a Zacks Rank #3, which translates into a short-term Hold rating, while the long-term stance remains at Neutral.