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AON Q1 Earnings Miss Estimates on Higher Expenses, Debt High
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Aon plc (AON - Free Report) reported first-quarter 2024 adjusted earnings of $5.66 per share, which missed the Zacks Consensus Estimate by 3.4%. The bottom line increased 9.5% year over year.
Total revenues advanced 5% year over year to $4.07 billion in the quarter under review but missed the consensus mark by 1.3%. The top line consisted of organic revenue growth of 5% and a 1% favorable impact from foreign currency translation. It also had a 1% favorable impact from fiduciary investment income and a 2% unfavorable impact from acquisitions and divestitures.
The weaker-than-expected quarterly results were caused by an elevated operating expense level and shaky results from the U.S. retail brokerage business in the Commercial Risk Solutions business. The negatives were partly offset by strong retention in multiple segments, new business generation and favorable impacts from currency translation. Strong performance in Wealth Solutions and Health Solutions was a major highlight.
Total operating expenses of $2.6 billion escalated 9% year over year in the first quarter and came 0.4% higher than our estimate. The increase was primarily due to a 5% higher compensation and benefits and 6% higher other general costs, partially offset by an 11% decrease in information technology costs.
Adjusted operating income was $1.6 billion, which rose 8% year over year and marginally beat our estimate. The adjusted operating margin of 39.7% increased from 38.7% a year ago and came higher than our estimate.
Revenue Lines
Commercial Risk Solutions: Organic revenues grew 3% year over year in the first quarter, attributable to solid retention rates, new business growth and management of the renewal book that led to strong growth across most of the major geographies. Strength in retail brokerage drove growth across EMEA and Asia and the Pacific. However, U.S. operations were affected by lower net new business and other factors. The segment’s revenues of $1.8 billion advanced 2% year over year but missed the Zacks Consensus Estimate by 2.6%, as well as our estimate by 2.2%.
Reinsurance Solutions: Organic revenues climbed 7% year over year in the quarter under review, driven by solid retention rates, new business generationand double-digit growth witnessed in the Strategy and Technology Group. The unit recorded revenues of $1.2 billion, which rose 8% year over year and beat our estimate by 1.3%. However, the figure missed the consensus mark by 0.7%.
Health Solutions: Organic revenues improved 6% year over year, courtesy of new business growth and management of the renewal book, resulting in global expansion of the core health and benefits brokerage business. Strength in Consumer Benefit Solutions was partially offset by some weaknesses observed in Talent operations. The segment’s revenues grew 9% year over year to $733 million in the first quarter, 0.2% higher than the Zacks Consensus Estimate.
Wealth Solutions: Organic revenues advanced 4% year over year in the quarter under review on the back of Retirement strength resulting from sustained advisory demand and project-related work associated with pension de-risking. The unit’s revenues of $370 million rose 6% year over year and outpaced the consensus mark by 1.7%, as well as our model estimate by 1.6%.
Financial Position (as of Mar 31, 2024)
Aon exited the first quarter with cash and cash equivalents of $995 million, which climbed from the $778 million level in 2023 end. Total assets of $40.8 billion increased from the 2023-end figure of $34 billion.
Long-term debt amounted to $15.9 billion, up from the $10 million figure as of Dec 31, 2023. Short-term debt and the current portion of the long-term debt stood at $606 million.
Aon generated cash flow from operations of $309 billion in the first quarter, which increased from the prior-year level of $443 million. Free cash flows (FCF) of $261 million fell 29% year over year in the same time frame. Capital expenditure was $48 million in the quarter under review.
Capital Deployment Update
Aon bought back 0.8 million class A ordinary shares for roughly $250 million in the first quarter. A leftover capacity of around $3.1 billion remained under its repurchase authorization as of Mar 31, 2024.
Management earlier hiked the quarterly cash dividend by 10% to 67.5 cents per share.
Forward Outlook
Revenues are forecasted to witness mid-single-digit or higher organic growth for 2024 and beyond. Free cash flow is projected to witness a decline in the short term due to multiple reasons. However, management remains optimistic to revert to its history of double-digit free cash flow growth in the long term on the back of growing operating income and continued working capital improvements.
It expects adjusted operating margin to expand in 2024. It also expects to accelerate the Aon United program, which can deliver around $100 million in savings in 2024. AON closed the NFP acquisition on Apr 25, which is expected to unlock new markets for the company.
At current foreign currency rates, it expects an unfavorable impact of 5 cents in the second quarter, 1 cent in the third quarter of 2024, a favorable impact of 1 cent in the December quarter and an unfavorable impact of 3 cents for full-year 2024. Interest expenses are anticipated to be $216 million in the second quarter, while interest income is expected at $33 million.
The Zacks Consensus Estimate for Brown & Brown’s 2024 full-year earnings is pegged at $3.61 per share, which indicates 28.5% year-over-year growth. The estimate jumped by 6 cents over the past week. BRO beat earnings estimates in each of the past four quarters, with an average surprise of 11.9%.
The Zacks Consensus Estimate for Ryan Specialty’s 2024 full-year earnings indicates a 28.3% year-over-year increase. It beat earnings estimates in two of the past four quarters and met twice, with an average surprise of 5.1%. Also, the consensus mark for RYAN’s 2024 full-year revenues suggests 19.5% year-over-year growth.
The consensus mark for Root’s 2024 full-year earnings indicates a 23.1% year-over-year improvement. The earnings estimate has witnessed two upward estimate revisions in the past two months against no movement in the opposite direction. Furthermore, the consensus estimate for ROOT’s 2024 full-year revenues suggests 101.8% year-over-year growth.
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AON Q1 Earnings Miss Estimates on Higher Expenses, Debt High
Aon plc (AON - Free Report) reported first-quarter 2024 adjusted earnings of $5.66 per share, which missed the Zacks Consensus Estimate by 3.4%. The bottom line increased 9.5% year over year.
Total revenues advanced 5% year over year to $4.07 billion in the quarter under review but missed the consensus mark by 1.3%. The top line consisted of organic revenue growth of 5% and a 1% favorable impact from foreign currency translation. It also had a 1% favorable impact from fiduciary investment income and a 2% unfavorable impact from acquisitions and divestitures.
The weaker-than-expected quarterly results were caused by an elevated operating expense level and shaky results from the U.S. retail brokerage business in the Commercial Risk Solutions business. The negatives were partly offset by strong retention in multiple segments, new business generation and favorable impacts from currency translation. Strong performance in Wealth Solutions and Health Solutions was a major highlight.
Aon plc Price, Consensus and EPS Surprise
Aon plc price-consensus-eps-surprise-chart | Aon plc Quote
Q1 Operations
Total operating expenses of $2.6 billion escalated 9% year over year in the first quarter and came 0.4% higher than our estimate. The increase was primarily due to a 5% higher compensation and benefits and 6% higher other general costs, partially offset by an 11% decrease in information technology costs.
Adjusted operating income was $1.6 billion, which rose 8% year over year and marginally beat our estimate. The adjusted operating margin of 39.7% increased from 38.7% a year ago and came higher than our estimate.
Revenue Lines
Commercial Risk Solutions: Organic revenues grew 3% year over year in the first quarter, attributable to solid retention rates, new business growth and management of the renewal book that led to strong growth across most of the major geographies. Strength in retail brokerage drove growth across EMEA and Asia and the Pacific. However, U.S. operations were affected by lower net new business and other factors. The segment’s revenues of $1.8 billion advanced 2% year over year but missed the Zacks Consensus Estimate by 2.6%, as well as our estimate by 2.2%.
Reinsurance Solutions: Organic revenues climbed 7% year over year in the quarter under review, driven by solid retention rates, new business generationand double-digit growth witnessed in the Strategy and Technology Group. The unit recorded revenues of $1.2 billion, which rose 8% year over year and beat our estimate by 1.3%. However, the figure missed the consensus mark by 0.7%.
Health Solutions: Organic revenues improved 6% year over year, courtesy of new business growth and management of the renewal book, resulting in global expansion of the core health and benefits brokerage business. Strength in Consumer Benefit Solutions was partially offset by some weaknesses observed in Talent operations. The segment’s revenues grew 9% year over year to $733 million in the first quarter, 0.2% higher than the Zacks Consensus Estimate.
Wealth Solutions: Organic revenues advanced 4% year over year in the quarter under review on the back of Retirement strength resulting from sustained advisory demand and project-related work associated with pension de-risking. The unit’s revenues of $370 million rose 6% year over year and outpaced the consensus mark by 1.7%, as well as our model estimate by 1.6%.
Financial Position (as of Mar 31, 2024)
Aon exited the first quarter with cash and cash equivalents of $995 million, which climbed from the $778 million level in 2023 end. Total assets of $40.8 billion increased from the 2023-end figure of $34 billion.
Long-term debt amounted to $15.9 billion, up from the $10 million figure as of Dec 31, 2023. Short-term debt and the current portion of the long-term debt stood at $606 million.
Aon generated cash flow from operations of $309 billion in the first quarter, which increased from the prior-year level of $443 million. Free cash flows (FCF) of $261 million fell 29% year over year in the same time frame. Capital expenditure was $48 million in the quarter under review.
Capital Deployment Update
Aon bought back 0.8 million class A ordinary shares for roughly $250 million in the first quarter. A leftover capacity of around $3.1 billion remained under its repurchase authorization as of Mar 31, 2024.
Management earlier hiked the quarterly cash dividend by 10% to 67.5 cents per share.
Forward Outlook
Revenues are forecasted to witness mid-single-digit or higher organic growth for 2024 and beyond. Free cash flow is projected to witness a decline in the short term due to multiple reasons. However, management remains optimistic to revert to its history of double-digit free cash flow growth in the long term on the back of growing operating income and continued working capital improvements.
It expects adjusted operating margin to expand in 2024. It also expects to accelerate the Aon United program, which can deliver around $100 million in savings in 2024. AON closed the NFP acquisition on Apr 25, which is expected to unlock new markets for the company.
At current foreign currency rates, it expects an unfavorable impact of 5 cents in the second quarter, 1 cent in the third quarter of 2024, a favorable impact of 1 cent in the December quarter and an unfavorable impact of 3 cents for full-year 2024. Interest expenses are anticipated to be $216 million in the second quarter, while interest income is expected at $33 million.
Zacks Rank & Key Picks
AON currently has a Zacks Rank #3 (Hold).
Investors interested in the broader Finance space can look at some better-ranked stocks like Brown & Brown, Inc. (BRO - Free Report) , Ryan Specialty Holdings, Inc. (RYAN - Free Report) and Root, Inc. (ROOT - Free Report) . While Brown & Brown currently sports a Zacks Rank #1 (Strong Buy), Ryan Specialty and Root carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Brown & Brown’s 2024 full-year earnings is pegged at $3.61 per share, which indicates 28.5% year-over-year growth. The estimate jumped by 6 cents over the past week. BRO beat earnings estimates in each of the past four quarters, with an average surprise of 11.9%.
The Zacks Consensus Estimate for Ryan Specialty’s 2024 full-year earnings indicates a 28.3% year-over-year increase. It beat earnings estimates in two of the past four quarters and met twice, with an average surprise of 5.1%. Also, the consensus mark for RYAN’s 2024 full-year revenues suggests 19.5% year-over-year growth.
The consensus mark for Root’s 2024 full-year earnings indicates a 23.1% year-over-year improvement. The earnings estimate has witnessed two upward estimate revisions in the past two months against no movement in the opposite direction. Furthermore, the consensus estimate for ROOT’s 2024 full-year revenues suggests 101.8% year-over-year growth.