Why Is Aon (AON) Down 3.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Aon (AON). Shares have lost about 3.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Aon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Aon's Q2 Earnings Beat Estimates, Revenues Down Y/Y

Aon’s second-quarter 2020 operating earnings of $1.96 per share, which surpassed the Zacks Consensus Estimate by 2.1%. Further, the bottom line improved 5% year over year on the back of reduced operating expenses, partially offset by lower revenues.

However, total revenues plunged 4% year over year to $2.5 billion, which included a decline of 1% in organic revenues. The top line also missed the consensus mark by 1.6%. The downside was primarily due to increased pressure on the company’s more discretionary parts of the business attributable to the COVID-19 pandemic, partly offset by solid new business generation in Reinsurance Solutions.

Operating margin grew 800 basis points (bps) to 23.8% and operating margin, adjusted for certain items, expanded 240 bps to 26.8%.
Total operating expenses in the second quarter declined 13% year over year to $1.9 billion, primarily owing to reduced restructuring charges, favorable impact from foreign currency translation, and the temporary reduction and deferral of certain discretionary expenses related to COVID-19.

Organic Revenue Catalysts

Commercial Risk Solutions: Organic revenues inched up 1% year over year on the back of strong growth across every major geographies, highlighted by double-digit growth in Latin America and Asia, primarily driven by solid retention and management of the renewal book portfolio. The segment reported a year-over-year decline of 4% in total revenues to $1.1 billion.

Reinsurance Solutions: Organic revenues improved 9%, driven by growth in facultative placements and new business generation. Moreover, total revenues for the segment improved 7% year over year to $448 million.
Retirement Solutions: Organic revenues slid 1% year over year. The results were impacted by continued pressure on the company’s more discretionary parts of the business due to the pandemic, mainly in Human Capital for rewards and assessment services. However, the results were partially offset by a solid rise in investments. Further, total revenues decreased 6% year over year to $393 million.

Health Solutions: Organic revenues plunged 18% year over year, primarily due to adverse annualized impact of lower employment levels and reduced renewals on account of the pandemic and continued pressure on the company’s more discretionary parts of the business.  Revenues from this segment declined 19% year over year to $258 million.

Data & Analytic Services: Organic revenues fell 8% year over year due to reduction in travel and events practice globally. Revenues slid 4% year over year to $274 million.

Financial Position

In the first half of 2020, the company’s cash flow from operations soared 238% from the first half of 2019 to $1.2 billion. Moreover, the company’s free cash flow $1.1 billion, which skyrocketed 343% from the first half of 2019. This upside can be attributed to increase in cash flow from operations.

The company exited the second quarter with cash and cash equivalents of $757 million, down 4.2% from the level at 2019 end. As of Jun 30, 2020, Aon had total assets worth $32 billion, up 8.8% from the level on Dec 31, 2019.

As of Jun 30, 2020, long-term debt stands at $7.2 billion, increasing 9.1% from the level at 2019 end.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Aon has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Aon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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