Analysts: Aon is A-OK
BY DAVID ROEDER email@example.com September 28, 2012 5:12PM
David Roeder reports on real estate at 6:22 p.m. every Thursday on WBBM-AM (780) and WBBM-FM (105.9). The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday
Updated: September 30, 2012 2:55AM
If analysts at William Blair & Co. are correct, Aon (AON) is a stock that will bloom starting later this year. And they aren’t alone in thinking positively about the insurance brokerage and human resources consultant.
Aon still has its name attached to a Chicago high-rise. Its corporate heart is here, but its official base is now London. Local investors will be inclined to forgive the company that misstep if it can deliver on the growth potential the Blair analysts see as real.
Here’s the key line from a Sept. 12 research report by a Blair team led by Adam Klauber: “Valuation methodologies indicate that Aon has potential upside of 25 percent to 40 percent over the next two years as investors recognize the significant value associated with a drastic increase in free cash flow and more consistent operating performance.”
That’s quite a bullish call, considering that the report was issued about a month after the stock touched a 52-week high of $53.35. It’s still close to that point, finishing Friday at $52.28.
The Blair team sees Aon digesting recent acquisitions and enjoying cost savings from the deals, especially its acquisition of the Hewitt consulting firm. One example of Hewitt’s upside is last week’s announcement that it is running a new health-care exchange for 100,000 U.S. workers, including those at Sears Holdings (SHLD).
Klauber said Aon’s operating cash flow should jump from $1.2 billion in 2012 to $2 billion in 2015, even after taking global economic trouble into account.
Its free cash could be used for share buybacks, debt reduction or dividend growth. Its current dividend yield is 1.2 percent.
Highly rated fund guru Bill Nygren, co-manager of three Oakmark mutual funds, also has taken notice of Aon. Reports from the second-quarter said Nygren’s funds bought 1.3 million shares of Aon at an average price of $48 each.
In a letter to his shareholders, Nygren said the market has been late in understanding the benefits of Aon’s restructuring. Insurance brokerage isn’t capital intensive, so “we believe Aon has the ability to return most of its earnings to shareholders through share repurchases and dividends,” Nygren wrote.
1 PERCENT OWNERSHIP: Remember those discount broker commercials of the 1990s that promised to bring the riches of stock trading to the average person? I remember the one that showed hordes crashing through the glass walls at some imagined exchange to get to the trading floor, an image that implied chaos more than fair access.
The left-leaning Economic Policy Institute said the supposed “democratization” of stock ownership never happened. The wealthiest 1 percent of households own a third of all stock assets, a proportion that’s little changed for years, it said. Since 1989, the top 20 percent of households has held 90 percent of stock wealth.
Despite the endless blather about markets on cable and online, it’s still true that less than half of American households — 46.9 percent — own stock, the group reports. That includes shares owned indirectly in retirement accounts.
RECOMMENDED READING: In the current issue of the Atlantic, Peter Boone and Simon Johnson write that the problems Europe is facing will pale against the financial panic that they believe will start in Japan. It is one of the most indebted nations, with a system that relied on cheap interest rates and public pensions predicated on economic growth and an expanding work force.
They argue that Japan is facing a demographic decline that can’t support the debt appetite. “Greece, Ireland, Portugal, Spain and Italy found their own ways to economic devastation, but each road was paved with easy credit,” they write. “Those whom the gods would destroy, they first encourage to borrow cheaply.”
Boone is a director at Salute Capital Management and Johnson is a professor at MIT.
HIGH ROLLER: According to ABC News, a guy in Orange County, Calif., sued the manufacturer of a $73,000 glass pool table because it could only be used with special balls. Regular balls scratch the glass.
A guy who spends $73,000 on a pool table needs to stay out of any public place where the game is played.
CLOSING QUOTE: “The policy of fiscal retrenchment in the midst of rising unemployment is pro-cyclical and pushing Europe into a deeper and longer depression. That is no longer a forecast; it is an observation. The German public doesn’t yet feel it and doesn’t quite believe it. But it is all too real in the periphery and it will reach Germany in the next six months or so.” — George Soros, chairman, Soros Fund Management