We have reiterated our Neutral recommendation on
Marsh & McLennan Cos. Inc.
) based on the current sustainability factor. Marsh & McLennan
reported its third quarter operating earnings per share of 24
cents, which came in line with the Zacks Consensus Estimate, but
was lower than 27 cents reported in the year-ago quarter.
Marsh & McLennan posted improved results on account of
top-line growth in all lines of businesses that also drove the
operating margin. Most of these upsides were offset by higher
operating expenses along with tax expenses.
Marsh & McLennan has a history of outperforming its peers
due to its size, diverse product offering, global presence and
technical expertise, thereby giving stiff competition to
arch-rivals such as
). The company's broking and consulting divisions of Guy Carpenter,
Mercer, Marsh and Oliver Wyman have been modestly contributing to
the fundamental growth. We believe a stable economy and improvement
in the insurance cycle should help boost both the insurance
brokerage and consulting business.
Besides, Marsh & McLennan's steady earnings growth and
improved operating cash flow continues to support debt reduction
and capital deployment effectively. This has also helped in
diminishing the interest expenses and in de-leveraging the balance
sheet. While the company's expanded stock buyback program and
dividend increment boosts investors' confidence, its refinanced
debt portfolio extends its maturity ladder, lowers the risk profile
and reduces the interest costs, thereby mitigating operational
On the flip side, Marsh & McLennan is encumbered with
significant pension obligations toward its employees that mounted
to $11 billion at the end of 2010. This is also reflected in higher
compensation and benefits costs, including increased pension costs
and higher consulting costs, which in turn poses additional burden
on the financial leverage while also influencing the debt credit
ratings. Additionally, it could also hurt the company's investment
portfolio and impede the process of raising capital in future.
In relation to the past, generating new business and client
retention have also become difficult as clients now choose to
diversify their business among multiple brokers in order to achieve
pricing power and as a hedge against further abuse by a broker.
This in turn increases the competition against other brokers as
Besides, external factors such as weak property-casualty market
amid the soft pricing environment and an increasing tendency for
risk retention by the clients have been compounding the stress
created by these internal problems. Even the fee-based business has
been of little help in attaining the targeted growth.
Increased dependence on international business further raises
caution on currency fluctuations, interest and tax rates. Moreover,
with a chain of acquisitions comes the risk of integration,
primarily amid the volatile global economic scenario.
Given the pros and cons, the Zacks Consensus Estimate for the
fourth quarter is projected at 46 cents per share, a nickel higher
than the year-ago quarter. For 2011, earnings are projected to be
$1.76 per share, about 7% higher over 2010.
Additionally, the quantitative Zacks Rank for Marsh &
McLennan is currently #3, indicating no clear directional pressure
on the shares over the near term.
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